Futures marketing section ii mechanics of futures trading
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Futures Marketing Section II Mechanics of Futures Trading. Price Discovery. Buyers and sellers interacting with information to arrive at a price through negotiation. Futures Market Price. A source of what buyers and sellers think a commodities worth, at some point in the future, today. .

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Futures Marketing Section II Mechanics of Futures Trading

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Futures MarketingSection II Mechanics of Futures Trading


Price Discovery

  • Buyers and sellers interacting with information to arrive at a price through negotiation.


Futures Market Price

  • A source of what buyers and sellers think a commodities worth, at some point in the future, today.


Futures Contract

  • A transferable agreement to make or take delivery of a standardized amount of a commodity of minimum quality during a specific month.

  • Every contract identical except for price.


Terms of a contract

  • Commodity

  • Price

  • Quantity

  • Quality

  • Time of Delivery

  • Place of Delivery

  • Terms of Payment


Additional Terms Related to the Futures Contract

  • Price Quotations and Price Fluctuations

  • Maximum Daily Price Change (limit move)

  • Volume of Trade

  • End of Delivery Month Trading Suspension

  • Bearish

  • Bullish


Delivery Months Basis for Selection

  • Natural Climatic Months

  • Concentration of Volume of Trading

  • Inertia


Settlement of a Futures Contract

  • Delivery

    • Short - make deliveryLong – take delivery

  • Offsetting Transaction

    • Reversing position with offsetting contract, if you were short in the market you would buy a contract.


Mechanics of Delivery

  • NOI – Notice of Intent to deliver short position

  • First Notice Day – Sent by short position to oldest long position

  • Delivery Day-

  • Retendering-


Functions of the Clearing House

  • Reconciliation of all futures contracts

  • Assuring the financial integrity of all transactions


Characteristics of Clearing House

  • Separate from exchange

  • Membership is very limited, must be members of the exchange

  • Requirements for membership are stringent

  • Stock Corporation

  • Members must deposit substantial money


Notice of IntentScenario

short

LS

LS

LS

L

A B CD E

Clearing House


Concept of Long and Short

Long ------------- Buy

Short -------------Sell


Open Interest

1 long + 1 short =

1 open contract


Open Interest Example

A sells to B

A- Short B- Long

C sells to B

A- ShortB-Long 2 contractsC- Short

Open Interest = 2Volume = 4


Volume and Open Interest CBOTNovember Soybeans as of Friday


Volume and Open Interest CBOTJanuary Soybeans as of Friday


Selecting a Brokerage House

  • Broker with Experience

  • Knowledge of Commodity

  • Convenience

  • Willingness to Service Account


Purpose of Margin

  • Secure Position of Trader

  • Solvency of Clearing House

    They take opposite sides of transaction


Margin Accounts

  • Separate for each customer

  • Audited frequently – see if posted properly and not being used

  • Commission House cannot use money

  • Amount can vary from one brokerage house to another

  • Does not pay interest


Initial Margin –amount you must post at origination of contract

  • Sell Contract – post $3,000 margin for soybeans. (5 to 15 % of contract)

  • What happens if price goes up?

  • Contract Losing Money

  • Effective Margin has been eroded.

  • When the EM reaches the call point you must post new margin money to bring you account back to the original level of margin.


Example -- Margin Call

  • Sell November Soybeans at $7.00 must post margin of 10 % of contract value.

  • Post Margin of 10 % of ($7 * 5,000 bushels)

  • Margin posted $3,500, call point is $2,000

  • If price increases to $7.40 what is the effective margin?

  • EM = $1,500, EM < Call Point must post new margin monies.


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