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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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Introduction to the futures market
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


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.


Chicago Mercantile Exchange is known primarily as a livestock exchangeLean HogsLive CattlePork BelliesFeeder Cattle



WHY CHICAGO? products


WHY CHICAGO? products

LOCATION


WHY CHICAGO? products

WATER TRANSPORT

RAIL ROAD DEVELOPMENT

LOCATION NEAR AGRICULTURAL LAND







FOUNDED IN 1848 products

CHARTERED BY THE STATE OF ILLINOIS IN 1859




THE EXCHANGE WAS ORGANIZED AS A NOT FOR PROFIT MEMBERSHIP ASSOCIATION

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


FINANCED THROUGH: ASSOCIATION

MEMBER DUES

RENTAL OF SPACE

FEES FOR PRICE QUOTES

SALE OF LITERATURE


MEMBERSHIPS ARE BOUGHT AND SOLD ON A BID AND OFFER BASIS -- THUS THE PRICE OF MEMBERSHIP IS MARKET DRIVEN


THERE ARE 1,402 FULL MEMBERSHIPS IN ADDITION THERE ARE ALSO ASSOCIATE MEMBERS THAT MAY TRADE ONLY IN CERTAIN CONTRACTS



STANDARDIZED CONTRACTS $450,000 TO $550,000

GRAINS = 5000 BUSHELS

SBM = 100 TONS

SBO = 60,000 LBS


STANDARD QUALITY $450,000 TO $550,000

CORN = #2 YELLOW


DELIVERY LOCATION $450,000 TO $550,000

CORN = CHICAGO OR TOLEDO


STANDARD DELIVERY TIMES $450,000 TO $550,000

CORN = DECEMBER, MARCH

MAY, JULY, SEPTEMBER

WHEAT THE SAME AS CORN



Why not every month of the year? AUGUST, SEPTEMBER

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


FUNCTIONS AUGUST, SEPTEMBER

Price Discovery




Buy low
BUY LOW AUGUST, SEPTEMBER

SELL HIGH


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

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


SPECULATION AUGUST, SEPTEMBER

Price Risk Management


FUNCTIONS AUGUST, SEPTEMBER

Price Discovery

Price Risk Management

Provide a Speculative Medium


THE ACCOUNTING PROCESS AUGUST, SEPTEMBER

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


THE ACCOUNTING PROCESS AUGUST, SEPTEMBER

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

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


THE ACCOUNTING PROCESS AUGUST, SEPTEMBER

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


THE ACCOUNTING PROCESS AUGUST, SEPTEMBER

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.


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

THE PRICE IS DETERMINED BY THE MARKET.


TYPES OF SPECULATORS MEMBERSHIPS ARE FIXED IN NUMBER

  • SCALPERS

    • SHORT TIME HORIZON

    • MANY TRADES

    • SMALL CHANGES


DAY TRADERS (PIT TRADERS) MEMBERSHIPS ARE FIXED IN NUMBER

SPECIALIZE IN ON TYPE OF COMMODITY

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


FLOOR TRADERS MEMBERSHIPS ARE FIXED IN NUMBER

LARGE POSITION

SEVERAL COMMODITIES

LONG TIME FRAME


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