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Standard Terms in a Futures Contract PowerPoint PPT Presentation


Standard Terms in a Futures Contract. Quantity Quality Expiration Months Delivery Terms Delivery Dates Minimum Price Fluctuations (tick) Daily Price Limits Trading Hours. CBOT Corn Futures Contract. 5,000 bushels

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Standard Terms in a Futures Contract

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Standard Terms in a Futures Contract

  • Quantity

  • Quality

  • Expiration Months

  • Delivery Terms

  • Delivery Dates

  • Minimum Price Fluctuations (tick)

  • Daily Price Limits

  • Trading Hours


CBOT Corn Futures Contract

  • 5,000 bushels

  • No. 2 Yellow at par and substitutions at differentials established by the exchange

  • March, May, July, September, December

  • Warehouse Receipt in Chicago, Toledo or St. Louis.

  • Last delivery day is the last business day of the delivery month.

  • 1/4 cent ($12.50 per contract)

  • 12 cents ($600 per contract)

  • 9:30 a.m. - 1:15 p.m. Chicago time, Mon-Fri. Trading in expiring contracts closes at noon on the last trading day. Project A® overnight session hours are from 9:00 p.m. -4:30 a.m. Chicago time, Sun-Thu


Buying a Futures Contract

  • “Long” Position

  • Agreement to Accept Delivery of the Commodity in the Delivery Month and Pay the Contracted Price


Selling a Futures Contract

  • “Short” Position

  • Agreement to Make Delivery of the Commodity in the Delivery Month and Receive the Contracted Price


Ways a Contract Can Be Settled

  • Settlement through Delivery (longs accept delivery from shorts).

  • Cash Settlement in delivery month (if defined in the contract).

  • Exchange for Physicals (EFPs)

  • Offset - take opposite, but equal position in the futures market.


Offsetting a Futures Contract

  • Today: Sell 1 Dec Wheat @ $2.85

    • Obligation to deliver wheat at a CBT approved warehouse in December and will be paid $2.85 ( delivery discounts).

  • October 30: Buy 1 Dec Wheat @ $3.00

    • Obligation to accept wheat at a CBT approved warehouse in December and will pay $3.00 ( delivery discounts).

  • The two contracts cancel each other, the trader settles the price difference of 15 cents.


Example of Cash Settlement

Basic Formula Price (BFP) Milk

  • Cash Settlement against the USDA announced BFP for the month.

  • June 1: Buy 1 July BFP Milk Futures: $13.14 cwt

  • August 5: July BFP Announced by USDA: $13.59

  • Contract is cash settled at $13.59 and the trader is paid 45 cents.


Clearinghouse

  • Guarantees all contracts

  • Assures that each trader honors contract obligations.

  • Assumes opposite position to every traders’ position.

    • A buyer to every seller

    • A seller to every buyer.

  • Facilitates delivery.


Sally Short

Sell 1 Dec Corn @ $2.20

Larry Long

Buy 1 Dec Corn @ $2.20

Clearinghouse

Sell 1 Dec Corn @ $2.20 to Larry Long

Buy 1 Dec Corn @ $2.20 from Sally Short

-No net position for the clearinghouse


Clearinghouse

  • Requires margin funds for each position.

    • Margin: a small sum of money which serves as a performance bond on the contract.

  • Profits and losses on a futures position are paid daily (marked-to-market) in reference to the settlement price.


Margin

  • Initial Margin - amount of money a trader must post to the clearinghouse for taking a position in the futures market.

  • Maintenance Margin - Minimum balance that must be maintained by a trader.

  • Margin Call - When margin balance falls below maintenance margin. Enough funds must be sent to bring margin balance back to initial margin.


Margin Requirements per Contract

CommodityInitialMaint.Contract Value

Corn$540$400$11,500 (5%)

Wheat$675$500$14,000 (5%)

Soybeans$1,000$800$22,500 (5%)

L. Cattle$600$450$26,000 (2%)

F. Cattle$1,000$750$34,000 (3%)

Hogs$1,200$900$18,000 (7%)

Pork Bellies $1,700$1,300$21,000 (8%)


Margins and Marking-to-Market

Sell 1 Nov. Soybean futures contract at $4.75. Initial margin=$1,000 and maintenance margin=$800

DaySettlement PriceProfitMargin Balance

1$4.750$1,000

2$4.70+$250$1,250

3$4.72-$100$1,150

4$4.76-$200 $950

5$4.81-$250 $700

=> Margin Call on Day 5 of $300 to bring margin balance to initial level


Traders & Brokers

  • Floor Trader

    • Independent

    • Broker

  • Futures Commission Merchant (FCM)

  • Introductory Broker/Account Exec (IB)

  • Commodity Trading Advisor (CTA)

  • Commodity Pool Operator (CPO)


Full Membership Prices (8/13/99)

  • CBOT$578,000

  • NYMEX$560,500

  • CME$345,000

  • NYBOT$113,000

  • KCBT $73,000

  • MGEX $14,000

  • MIDAM $4,500


Speculators

  • On-floor versus Off-floor

  • Scalpers

  • Day Traders

  • Position Traders

  • Spread Traders

  • Fundamental Analysis vs. Technical Analysis


Futures Markets Regulators

  • Brokers

  • Exchange/Clearinghouse

  • National Futures Association (NFA)

  • Commodity Futures Trading Commission (CFTC)


Broker Regulation

  • Broker represents his/her customers to the exchange and clearinghouse

  • Ensure customer activities are proper

  • “Know your customer”


Futures Exchange

  • Establish and enforce trading rules for members

  • Exchange rules prohibit:

    • Prearranged Trading

    • Front Running

  • Does self-regulation work?


National Futures Association (NFA)

  • Screening and testing applicants for registration (Series III - National Commodity Futures Exam)

  • FCM, IB, CTA’s and CPO’s are required to be registered with the NFA

  • NFA can audit, suspend or expel registrants for infractions.


Commodity Futures Trading Commission (CFTC)

  • Government agency responsible for regulating the futures industry.

  • Approval of new contracts.

  • Price limits and delivery.

  • Price manipulation.

  • SEC vs CFTC


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