Becoming Familiar With the Futures Market Section: Advanced Agribusiness Unit: Marketing Lesson...

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Slide 2 Becoming Familiar With the Futures Market Section: Advanced Agribusiness Unit: Marketing Lesson Title: Becoming Familiar With the Futures Market Slide 3 Becoming Familiar With the Futures Market 1.Define the futures market and its functions and understand the functions of the futures exchange. 2.Define a futures contract and understand its standardized terms. 3.Describe the different futures market participants. 4.Understand the clearing house and margins. 5.Describe the difference between short and long contracts. 6. Describe carrying charges. Slide 4 Objective 1: Defining the Futures Market Slide 5 Objective 1: Defining the Futures Market The Futures Market is defined as: The process of trading futures contracts and operating the facilities that market many Ag products. Slide 6 Objective 1: The Functions of the Futures Market 1.Provide an efficient and effective mechanism for the management of price risk. 2.Provide an efficient mechanism for price discovery. 3.Provide a source of information for decision making. 4.Provide a means for firms to secure additional operating capital. Slide 7 Objective 1: The Functions of the Futures Exchange 1.To bring together in a central place a large number of buyers and sellers. 2.To establish and enforce trading rules and standards. 3.To settle disputes. 4.To collect and disseminate marketing information to the public. Slide 8 Objective 1: Define the futures market. Functions of the futures market. Functions of the futures exchange. Slide 9 Objective 2 Define a futures contract and understand its standardized terms Slide 10 Define a futures contract oA legally binding commitment to make or take delivery of a standardized quantity and quality of a commodity at a predetermined place and time in the future, for a price determined by auction in the trading pit of an exchange oPrice is determined by open outcry. oOpen outcry is when bids are shouted in a pit. oThe benefit of open outcry is that it is competitive price discovery. Slide 11 Define A Futures Contract Cont. There are two ways that a futures contract can be settled. oDelivery oLess than 1% of all contracts traded is delivered on. oOffsetting. oMeans to do the opposite of what you had previously done. oExample: if you had previously bought a contract, you sell it back. If you had sold one, then you buy it back. Slide 12 Standardized Terms 1.All terms for a futures contract are standardized, EXCEPT the price. 1.The price again is found by open outcry in the trading pit. 2. The standardized terms include the following: 1.Delivery month 1.month of contracts. 2.For example: March, May, July, September, December. 2.Contract Size 1.Unit size of the contracts. 2.For Example: Grains are 5000bu; Feeder cattle are 50000lbs and live cattle (fat Cattle) are 40000lbs Slide 13 Standardized Terms Cont. 3. Place of delivery oif delivered on the par delivery point. 4. Minimum Price fluctuations ominimum movement in the price. ofor example: cent in grains. 5. Maximum daily price move 1.Maximum it can move in one day. 2.for example 30 cents in wheat. Slide 14 Objective 2 Define a Futures contract. Standardized Terms. Slide 15 Think, Pair, Share Slide 16 Objective #3 Describe the different futures market participants Slide 17 Objective 3: Describe the different futures market participants 1.There is a difference between traders and brokers: 1.Traders 1.buy and sell contracts for him or her self does not take customer orders. 2.Brokers 1.take customers orders; may trade for him or her self, but first responsibility is his customer. Slide 18 Objective 3: Describe the different futures market participants 1.We can classify the people who are the futures market participants into several different categories. The general public that trades would be in the last two categories: either public speculators or hedgers. 1.Floor brokers: fill orders for outside speculators and hedgers. 2.Professional Speculators: trade for own accounts. 3.Scalpers buys and sells minute by minute. 4.Pit traders take larger positions and hold for longer, but usually not overnight. Slide 19 Objective 3: Describe the different futures market participants. 5. Floor traders take large positions and hold for several days. 6. Hedgers: Producers or users of commodities who seek protection against adverse price changes by taking a futures position opposite to cash position. 7. Public speculators: Place orders with brokers to profit from anticipated price changes. Not necessarily interested in owning the commodity, but only in profiting off movements in the price. Slide 20 Objective 3 Different Futures Market Participants. Traders, Brokers Floor Brokers Professional Speculator Scalper Pit Trader Floor Trader Hedgers Public Speculators Slide 21 Objective 4 Understand the clearinghouse and margins Slide 22 Objective 4: Understand the clearinghouse and margins Clearing House oAssumes the opposite side of every trade so that all connections between buyers and sellers are served. oBecause the number of buys = number of sells, the clearing house has no net position. Slide 23 Objective 4: Margins 1.To trade you must have an account. 2.With every new trade, traders must deposit money called margin. 3.Margins serves as a deposit. 4.Initial margin: initial deposit paid. 5.Maintenance Margin: minimum amount of money that must be kept in accounts. 6.Margins are NOT a COST for trading futures. Your margin money is a deposit in your account and if your trade is not a losing trade, you will still have your margin money. 7.The clearing house marks-to-market all open positions at the end of a day to adjust all accounts. Slide 24 Objective 4: Margins Cont. 8. Margin Call when the equity in the traders account falls below the maintenance margin level. 9. Must then deposit enough funds to bring the equity in the account back to the initial margin level. Slide 25 Objective 4 Clearinghouse Margins Slide 26 Little Professor Moment Teach to your partner Slide 27 Objective 5: Describe the difference between short and long positions. Slide 28 Objective 5: Short Position The term to sell is also known as a short position. To be short means that you are trying to protect the commodity in your possession from falling prices. Producers are generally sellers of short position holders. Short = Sell = Protect from falling prices = producer. Slide 29 Objective 5: Long Position The term to buy is also known as a long position. To be long means that you are trying to protect the purchase price of a commodity that you plan on obtaining from rising prices. Mills, Factories, and packers would be long position holders Long = Buy = protect from increasing prices = Mills, factories, packers Slide 30 Simple Rule: Buy Low and Sell High in either order Slide 31 Objective 5 Short Position Long Position Simple Rule Slide 32 Objective 6: Describe carrying charges Slide 33 1.Carrying Charge = the difference in the prices from one futures contract to another. Slide 34 Normal Market 1.Normal Market = is nearby price is lower than the distant contract price so prices increase into the future. It reflects the cost of storage. For example, if the nearby month is Dec and the Dec price is 2.32 and the March price 2.39 and the May price is 2.44 and the July Price is 2.48 and the Sept price is 2.57 then the market is normal. 2.Is common when supplies are large. 3.Tells the trader what the market will pay for storage. 4.Futures price spreads rarely reflect full carrying charge. Slide 35 Inverted Market 1.Inverted Market = 1.nearby prices are higher than distant contract prices So prices decrease into the future. 2.It reflects a negative price of storage. In other words, we are in short demand of the product so the market price is telling you that they will pay a premiums if the product is delivered now do not store the product until later. 3.For example, if Dec is the nearby month again, but this time the Dec price is 2.32, the March price is 2.28, the May price is 2.20, the July price is 2.16, and the Sept price is 2.10, now the market is inverted. Slide 36 Inverted Market Cont. 4. Usually prevails when supplies are small. 5. Market says they will pay a premium if you deliver now. 6. Reflects negative price of storage. Slide 37 Objective 6 Carrying Charge Normal Market Inverted Market Slide 38 Review and Summary Slide 39 Now You Should Be Able To: 1.Define the futures market and its functions and understand the functions of the futures exchange. 2.Define a futures contract and understand its standardized terms. 3.Describe the different futures market participants. 4.Understand the clearing house and margins. 5.Describe the difference between short and long contracts. 6. Describe carrying charges. Slide 40 Any Questions Slide 41 Quiz 1.Define the futures market. 2.What are the four main functions of a futures market? 3.What are the four main functions of a futures exchange? 4.What is a futures contract? 5.Price is determined by _______________ 6.What is open Out cry? 7.What are the two ways a futures contract can be settled? Slide 42 Quiz 8. What are the 5 standardized terms of a futures contract? 9. Who are the participants in the futures market? 10 What is a Clearinghouse? 11. What is the purpose of the clearinghouse? 12. What is a Margin? 13. What is a Maintenance Margin? 14. What is a Short Position? 15. Who is most likely to take a Short Position? 16. What is a Long Position? Slide 43 Quiz 17. Who is most likely to take a Long Position? 18. What is a normal market and give an example of a Normal Market? 19. What is an Inverted Market and give an example of such a market? 20. What is the simple rule to follow when making trades on the futures market?