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Chicago Mercantile Exchange

Chicago Mercantile Exchange

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Chicago Mercantile Exchange

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  1. Chicago Mercantile Exchange

  2. Chicago Mercantile ExchangeFounded in 1898 as the Chicago Butter and Egg Board(Chicago Board of Trade was chartered in 1848)

  3. By 1919 it was known as the Mercantile Exchange 1961 – Introduced trading of frozen pork bellies

  4. Pork bellies, more commonly known as bacon, are obtained from the underside of a hog. A hog has two bellies, generally weighing about 8-18 pounds, depending on the hog's commercial slaughter weight.

  5. In 1964 Live Cattle futures were introduced. The first futures contract that is based on a non-storable commodity.

  6. 1972 - Introduced currency futures1981- Eurodollar futures were introduced (Interest Rate Futures)

  7. 1982 – Stock Index Futures (S&P 500)2002– CME Converts from a Not -for-Profit Membership Entity to a for profit corporation.

  8. CME has four major product areas:Interest RateStock IndexesForeign ExchangeCommodities

  9. LIVESTOCK FUTURES MARKETS PRICE RISK

  10. PRICE RISK INVENTORY UNKNOWN AND VARIABLE PRICES

  11. LIVESTOCK PRODUCERS FACE RISK FROM: PRICE OF THEIR PRODUCTS PRICE OF INPUTS

  12. Cattle Prices Weekly Lean Hogs

  13. Lean Hog Prices

  14. Corn Prices Weekly Corn

  15. CHICAGO MERCANTILE EXCHANGE LIVE CATTLE LEAN HOGS FEEDER CATTLE PORK BELLIES

  16. LIVE CATTLE CONTRACT SIZE: 40,000 LBS DELIVERY MONTHS: FEB, APRIL, JUNE, AUG, OCT, DEC HOURS OF TRADE : 9:05 AM TO 1:00 PM LIMIT: $3.00/CWT

  17. LEAN HOG CONTRACTS: CONTRACT SIZE : 40,000 LBS DELIVERY MONTHS: FEB, APRIL, JUNE, JULY, AUG, OCT, DEC. HOURS OF TRADE: 9:10 AM TO 1:00 PM LIMIT MOVE: $2.00/CWT

  18. FEEDER CATTLE CONTRACTS: CONTRACT SIZE: 50,000 LBS DELIVERY MONTHS: JAN, MARCH, APRIL, MAY, AUG, SEPT, OCT, NOV. TIME OF TRADE: 9:05 AM - 1:00 PM

  19. LEAN HOGS LIVE HOG CONTRACTS WERE REPLACED WITH LEAN HOG CONTRACTS IN 1996 WHY? 70% OF U.S. HOGS ARE BOUGHT ON CARCASS BASIS

  20. A LIVE ANIMAL YIELDS APPROXIMATELY 74%, THUS A LEAN HOG VALUE IS EQUIVALENT TO THE LIVE HOG PRICE DIVIDED BY .74

  21. SO IF LIVE HOGS ARE PRICED AT $40.00/CWT A LEAN EQUIVALENT WOULD BE 40/.74 = $54.00

  22. HEDGING AND SPECULATION HEDGING -- TAKE AN OPPOSITE POSITION IN THE FUTURES AS YOU HAVE IN THE CASH MARKET.

  23. THE BASIC PREMISE: CASH PRICES AND FUTURES PRICES MOVE GENERALLY IN THE SAME DIRECTION

  24. THUS A LOSS IN THE CASH MARKET WILL BE MADE UP IN THE FUTURES MARKET.

  25. SPECULATION: BUY LOW SELL HIGH

  26. IT DOES NOT MATTER IN WHICH ORDER FUTURES MARKETS ARE ATTRACTIVE TO SPECULATORS BECAUSE A. MARGIN B. VOLATILITY

  27. THE CURRENT MARGIN ON A LEAN HOG CONTRACT IS ABOUT $1000 (THE EXCHANGE SETS THE MINIMUM)

  28. EXAMPLE APRIL HOGS ARE TRADING AT ABOUT $65/CWT $65/CWT X 40,000 LBS = $26,000 MARGIN IS ABOUT 4%

  29. MARGIN IS A PERFORMANCE BOND - INITIAL AND MAINTENANCE IF YOUR EQUITY DROPS BELOW MAINTENANCE LEVEL YOU MUST DEPOSIT MORE MARGIN

  30. LIVESTOCK BASIS 1) LOCATION 2) QUALITY 3) FOR DEFERRED CONTRACTS -- ANTICIPATED SUPPLY AND DEMAND

  31. HOGS CURRENT CASH = $59.50 APRIL FUTURES = $57.55 JUNE FUTURES = $ 66.40 JULY FUTURES = $ 66.33 OCTOBER FUTURES = $55.17

  32. BASIS OVER TIME PRICE DIFFERENCES + 0 - TIME

  33. WHY MUST CASH AND FUTURES COME TOGETHER?

  34. WHY MUST CASH AND FUTURES COME TOGETHER? ARBITRAGE BETWEEN THE FUTURES AND THE CASH