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Understanding Futures Markets: Prices, Hedging, and Definitions

Learn the intricacies of futures markets, including price quotes, hedging, speculation, and liquidity. Explore historical data, contract trading details, and the difference between futures and forward contracts. Discover the advantages of standardized futures contracts and the role of exchanges.

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Understanding Futures Markets: Prices, Hedging, and Definitions

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  1. Reminder: Assignment #1 • e-mail to seanfox@agecon.ksu • Include a futures price quote, e.g. …. • KC July Wheat closed @ 3020 ($3.20/bu) on Jan 20 • Apr Live Cattle closed at 7355 ($73.55/cwt) on Jan 20 • and the source of the information, • cc to Chrisy Cundiff ccundiff@agecon.ksu.edu • Due: Friday, Jan. 25 (5 points)

  2. Video What did you learn? • Market participants ? • Purpose of futures markets ? • Hedging – what is it ? Why hedge? • Speculation – good or bad? • Liquidity ??

  3. Prices: Kansas City Wheat July 2002 contract. Open High Low Close Change Fri: 307.50 307.75 305.00 ???.?? -1.25 Tue: 304.00 305.00 302.00 302.00 -3.75 Wed: 301.00 see www.kcbt.com

  4. Same data - DTN (WA 336) July 2002 contract. High Low Close Change Fri: 3076 3050 ???? -12 Tue: 3050 3020 3020 -36 Wed:

  5. Same contract 2 years ago: July 2000 Contract. (as of Jan 2000) Open High Low Close Fri: 311.00 315.50 310.00 312.25 Tue: 309.50 313.75 302.00 312.75 Wed: 313.00

  6. More prices • Contracts trade for several delivery months • Wheat: July, Sep, Dec, Mar, May • Tuesday – DTN for KW (KC Wheat) High Low Close Change Mar: 2926 2900 2904 -32 Mar: 2982 2956 2960 -24 Jul: 3050 3020 3020 -36

  7. Livestock prices • Tuesday – DTN for LC (Live Cattle) High Low Close Change Feb: 7187 7112 7117 -37 Apr: 7480 7350 7355 -75 Jun: 7055 6975 6977 -60 Note •  $69.75/cwt; BUT 6977  $69.77½/cwt www.cme.com

  8. Futures Contracts • what they are • compare to forward contracts • who uses futures • why

  9. Definition • A futures contract: • is an agreement (a contract, a promise) between a buyer and a seller • that requires the seller to deliver and the buyer to accept delivery of: • a specified amount • of a specified commodity • at a specified location • on some (specified) future date

  10. “Short” and “Long” • Seller - is said to be “short the futures” or “short” • Buyer - is “long the futures” or “long”

  11. History • Grain markets • 19th century, Chicago grew as a grain terminal • at harvest -- oversupply -- grain dumped • 1848 - founding of the CBOT • established a “year-round”market by trading “to arrive” (forward cash) contracts • established quality standards

  12. Forward Contracts • Advantages • “assured” seller of a buyer and a price • Disadvantages • producer obliged to deliver • performance not guaranteed • not standardized • each item had to be negotiated • often difficult to find an opposite • not transferable

  13. Futures: Advantages vs. Forwards • Performance guaranteed • every buyer and every seller deposits “margin” money with the exchange • the exchange acts as a “middle-man” in every contract

  14. Futures Contracts -- Advantages 2. Standardized terms • quantity • quality • time • location • Only thing negotiated is PRICE

  15. Standardized ----> Transferable Obligations to deliver or accept can be transferred or “offset”. How? By entering into a 2nd contract equal and opposite to the original.

  16. Exchanges • CBOT Chicago Board of Trade Corn, SRW Wheat, SoyBeans • CME Chicago Mercantile Exchange Livestock, Hogs, Currencies • KCBT Kansas City Board of Trade HRW Wheat, • MidAm MidAmerica Commodity Exchange Mini Contracts (CBOT, CME commodities)

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