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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

Futures MarketingSection II Mechanics of Futures Trading


Price discovery
Price Discovery

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


Futures market price
Futures Market Price

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


Futures contract
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
Terms of a contract

  • Commodity

  • Price

  • Quantity

  • Quality

  • Time of Delivery

  • Place of Delivery

  • Terms of Payment


Additional terms related to the futures contract
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
Delivery Months Basis for Selection

  • Natural Climatic Months

  • Concentration of Volume of Trading

  • Inertia


Settlement of a futures contract
Settlement of a Futures Contract

  • Delivery

    • Short - make delivery Long – take delivery

  • Offsetting Transaction

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


Mechanics of delivery
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
Functions of the Clearing House

  • Reconciliation of all futures contracts

  • Assuring the financial integrity of all transactions


Characteristics of clearing house
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 intent scenario
Notice of Intent Scenario

short

LS

LS

LS

L

A B C D E

Clearing House


Concept of long and short
Concept of Long and Short

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

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


Open interest
Open Interest

1 long + 1 short =

1 open contract


Open interest example
Open Interest Example

A sells to B

A- Short B- Long

C sells to B

A- Short B-Long 2 contracts C- Short

Open Interest = 2 Volume = 4


Volume and open interest cbot november soybeans as of friday
Volume and Open Interest CBOTNovember Soybeans as of Friday


Volume and open interest cbot january soybeans as of friday
Volume and Open Interest CBOTJanuary Soybeans as of Friday


Selecting a brokerage house
Selecting a Brokerage House

  • Broker with Experience

  • Knowledge of Commodity

  • Convenience

  • Willingness to Service Account


Purpose of margin
Purpose of Margin

  • Secure Position of Trader

  • Solvency of Clearing House

    They take opposite sides of transaction


Margin accounts
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
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
Example -- Margin Call contract

  • 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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