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INTRODUCTION TO THE FUTURES MARKET. FUTURES CONTRACTS ARE TRADED ON ORGANIZED EXCHANGES Chicago Board of Trade (CBOT) Chicago Mercantile Exchange (CME). THE EVOLUTION OF AN EXCHANGE. CHICAGO BOARD OF TRADE.

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Presentation Transcript
slide2
FUTURES CONTRACTS ARE TRADED ON ORGANIZED EXCHANGES

Chicago Board of Trade (CBOT)

Chicago Mercantile Exchange (CME)

slide3

THE EVOLUTION OF AN EXCHANGE

CHICAGO BOARD OF TRADE

slide4

Chicago Board of Trade is Known primarily as a grain exchange.CornSoybeansWheat OatsSoybean MealSoybean OilHowever most of the volume is now in the financial futures.

slide6
Chicago Mercantile Exchange is known primarily as a livestock exchangeLean HogsLive CattlePork BelliesFeeder Cattle
slide10
WHY CHICAGO?

LOCATION

slide11
WHY CHICAGO?

WATER TRANSPORT

RAIL ROAD DEVELOPMENT

LOCATION NEAR AGRICULTURAL LAND

slide17
FOUNDED IN 1848

CHARTERED BY THE STATE OF ILLINOIS IN 1859

slide20
THE EXCHANGE WAS ORGANIZED AS A NOT FOR PROFIT MEMBERSHIP ASSOCIATION

Now both theChicago Mercantile Exchange and the CBOT are for profit corporation)

slide21

FINANCED THROUGH:

MEMBER DUES

RENTAL OF SPACE

FEES FOR PRICE QUOTES

SALE OF LITERATURE

slide22
MEMBERSHIPS ARE BOUGHT AND SOLD ON A BID AND OFFER BASIS -- THUS THE PRICE OF MEMBERSHIP IS MARKET DRIVEN
slide23
THERE ARE 1,402 FULL MEMBERSHIPS IN ADDITION THERE ARE ALSO ASSOCIATE MEMBERS THAT MAY TRADE ONLY IN CERTAIN CONTRACTS
slide25
STANDARDIZED CONTRACTS

GRAINS = 5000 BUSHELS

SBM = 100 TONS

SBO = 60,000 LBS

slide26
STANDARD QUALITY

CORN = #2 YELLOW

slide27
DELIVERY LOCATION

CORN = CHICAGO OR TOLEDO

slide28
STANDARD DELIVERY TIMES

CORN = DECEMBER, MARCH

MAY, JULY, SEPTEMBER

WHEAT THE SAME AS CORN

slide30
Why not every month of the year?

Liquidity -- Need to make sure the volume is sufficient to allow for efficient trading.

slide31

FUNCTIONS

Price Discovery

buy low
BUY LOW

SELL HIGH

slide35

In the futures market you can sell first and then buy later.

You still hope that you sell at a higher price than the eventual purchase price.

slide36

SPECULATION

Price Risk Management

slide37

FUNCTIONS

Price Discovery

Price Risk Management

Provide a Speculative Medium

slide38
THE ACCOUNTING PROCESS

MARGIN MONEY -- PERFORMANCE BOND -- A FRACTION OF THE VALUE OF THE CONTRACT

slide39
THE ACCOUNTING PROCESS

MARGIN MONEY -- PERFORMANCE BOND -- A FRACTION OF THE VALUE OF THE CONTRACT

IF THE MARKET MOVES AGAINST THE TRADER -- MORE MARGIN IS REQUIRED

slide40
THE ACCOUNTING PROCESS

MARGIN MONEY -- PERFORMANCE BOND -- A FRACTION OF THE VALUE OF THE CONTRACT

IF THE MARKET MOVES AGAINST THE TRADER -- MORE MARGIN IS REQUIRED

MINIMUM INITIAL MARGINS ARE SET BY THE EXCHANGES

slide41
THE ACCOUNTING PROCESS

MAINTENANCE MARGIN

Corn --- Initial Margin = $540

Maintenance = $400

In other words if you are “long” and price falls 3 cents then you would deposit more money.

slide42
ONLY MEMBERS OF THE EXCHANGE CAN TRADE ON THE FLOOR -- MEMBERSHIPS ARE FIXED IN NUMBER

THE PRICE IS DETERMINED BY THE MARKET.

slide43
TYPES OF SPECULATORS
  • SCALPERS
    • SHORT TIME HORIZON
    • MANY TRADES
    • SMALL CHANGES
slide44
DAY TRADERS (PIT TRADERS)

SPECIALIZE IN ON TYPE OF COMMODITY

ENTER THE PIT WITH NO POSITION AND LEAVE THE PIT WITH NO POSITION

slide45
FLOOR TRADERS

LARGE POSITION

SEVERAL COMMODITIES

LONG TIME FRAME

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