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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.

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INTRODUCTION TO THE FUTURES MARKET

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  1. INTRODUCTION TO THE FUTURES MARKET

  2. FUTURES CONTRACTS ARE TRADED ON ORGANIZED EXCHANGES Chicago Board of Trade (CBOT) Chicago Mercantile Exchange (CME)

  3. THE EVOLUTION OF AN EXCHANGE CHICAGO BOARD OF TRADE

  4. 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.

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

  6. As with the CBOT the major volume is not in agricultural products

  7. WHY CHICAGO?

  8. WHY CHICAGO? LOCATION

  9. WHY CHICAGO? WATER TRANSPORT RAIL ROAD DEVELOPMENT LOCATION NEAR AGRICULTURAL LAND

  10. OPENING OF THE ILLINOIS-MICHIGAN CANAL IN 1848

  11. GROWTH OF POPULATION ON EAST COAST

  12. BEGINNING OF EUROPEAN DEMAND FOR GRAIN (CRIMIEAN WAR)

  13. BEGINNING OF EUROPEAN DEMAND FOR GRAIN (CRIMIEAN WAR)

  14. WAR BETWEEN THE STATES

  15. FOUNDED IN 1848 CHARTERED BY THE STATE OF ILLINOIS IN 1859

  16. IN 1865 CONTRACTS ARE FORMALIZED INTO WHAT IS NOW CALLED FUTURES CONTRACTS.

  17. IN 1885 THE CBOT MOVES TO ITS CURRENT LOCATION AT THE CORNER OF LASALLE STREET AND JACKSON

  18. THE EXCHANGE WAS ORGANIZED AS A NOT FOR PROFIT MEMBERSHIP ASSOCIATION Now both theChicago Mercantile Exchange and the CBOT are for profit corporation)

  19. FINANCED THROUGH: MEMBER DUES RENTAL OF SPACE FEES FOR PRICE QUOTES SALE OF LITERATURE

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

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

  22. THE VALUE OF A MEMBERSHIPS HAS RECENTLLY RANGED FROM $450,000 TO $550,000

  23. STANDARDIZED CONTRACTS GRAINS = 5000 BUSHELS SBM = 100 TONS SBO = 60,000 LBS

  24. STANDARD QUALITY CORN = #2 YELLOW

  25. DELIVERY LOCATION CORN = CHICAGO OR TOLEDO

  26. STANDARD DELIVERY TIMES CORN = DECEMBER, MARCH MAY, JULY, SEPTEMBER WHEAT THE SAME AS CORN

  27. SOYBEAN DELIVERY MONTHS = NOV, JAN, MARCH, MAY, JULY, AUGUST, SEPTEMBER

  28. Why not every month of the year? Liquidity -- Need to make sure the volume is sufficient to allow for efficient trading.

  29. FUNCTIONS Price Discovery

  30. THE TRADING IS CONDUCTED IN "PITS" AND BY OPEN OUTCRY.

  31. EACH BID AND OFFER IS AVAILABLE TO ALL TRADERS

  32. BUY LOW SELL HIGH

  33. 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.

  34. SPECULATION Price Risk Management

  35. FUNCTIONS Price Discovery Price Risk Management Provide a Speculative Medium

  36. THE ACCOUNTING PROCESS MARGIN MONEY -- PERFORMANCE BOND -- A FRACTION OF THE VALUE OF THE CONTRACT

  37. 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

  38. 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

  39. 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.

  40. ONLY MEMBERS OF THE EXCHANGE CAN TRADE ON THE FLOOR -- MEMBERSHIPS ARE FIXED IN NUMBER THE PRICE IS DETERMINED BY THE MARKET.

  41. TYPES OF SPECULATORS • SCALPERS • SHORT TIME HORIZON • MANY TRADES • SMALL CHANGES

  42. DAY TRADERS (PIT TRADERS) SPECIALIZE IN ON TYPE OF COMMODITY ENTER THE PIT WITH NO POSITION AND LEAVE THE PIT WITH NO POSITION

  43. FLOOR TRADERS LARGE POSITION SEVERAL COMMODITIES LONG TIME FRAME

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