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REVIEW OF FUTURES MARKETS

REVIEW OF FUTURES MARKETS. 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. WHY CHICAGO?. WHY CHICAGO? LOCATION. WHY CHICAGO?. WATER TRANSPORT. WATER TRANSPORT

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REVIEW OF FUTURES MARKETS

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  1. REVIEW OF FUTURES MARKETS

  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. WHY CHICAGO?

  5. WHY CHICAGO? LOCATION

  6. WHY CHICAGO? WATER TRANSPORT

  7. WATER TRANSPORT RAIL ROAD DEVELOPMENT WHY CHICAGO?

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

  9. OPENING OF THE ILLINOIS-MICHIGAN CANAL IN 1848

  10. GROWTH OF POPULATION ON EAST COAST

  11. BEGINNING OF EUROPEAN DEMAND FOR GRAIN (CRIMEAN WAR)

  12. WAR BETWEEN THE STATES

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

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

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

  16. THE EXCHANGE WAS ORGANIZED AS A NOT FOR PROFIT MEMBERSHIP ASSOCIATION, IN OCTOBER OF 2005 IT WAS REORGANIZED AS A FOR PROFIT PUBLICLY TRADED COMPANY. The CBOT was purchased by the CME in 2007.

  17. What is being traded?Standardized Futures Contracts

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

  19. STANDARD QUALITY CORN = #2 YELLOW

  20. DELIVERY LOCATION CORN = CHICAGO OR TOLEDO

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

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

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

  24. Three Important Functions of a Commodity Futures Market

  25. FUNCTIONS • Price Discovery • Competitive market environment • Access to information • Incentive to do a good job

  26. FUNCTIONS • Price Discovery • Price Risk Management • Inventory and unknown and variable prices • Hedging price risk • Temporary substitute for a future cash transaction

  27. FUNCTIONS • Price Discovery • Price Risk Management • Provide a Speculative Medium

  28. SPECULATION BUY LOW SELL HIGH Speculation vs Gambling

  29. Agricultural Group THE ACCOUNTING PROCESS MARGIN MONEY -- PERFORMANCE BOND -- A FRACTION OF THE VALUE OF THE CONTRACT

  30. 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

  31. 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

  32. THE ACCOUNTING PROCESS MAINTENANCE MARGIN: IF EQUITY LEVEL DROPS BELOW A CERTAIN AMOUNT MORE FUNDS MUST BE DEPOSITED

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

  34. EACH BID AND OFFER IS AVAILABLE TO ALL TRADERS

  35. A SET OF HAND SIGNALS HAS BEEN DEVELOPED.

  36. HEDGING-- TAKE OPPOSITE POSITION IN FUTURES AS YOU HAVE IN CASH

  37. HEDGING GAIN OR LOSS IN FUTURES WILL OFFSET GAIN OR LOSS IN CASH

  38. PRICES FOR CORN CASH PRICE AT HEYWORTH, ILL = $3.40 MAY FUTURES = $3.64 JULY FUTURES = $3.75

  39. WHY THE PRICE DIFFERENCES? 1) LOCATION 2) TIME 3) QUALITY 4) LOCAL SUPPLY AND DEMAND CONDITIONS

  40. BASIS = CASH PRICE - FUTURES PRICE

  41. PRICE DIFFERENCES OVER TIME ARE ACCOUNTED FOR BY STORAGE COST. (COST OF CARRY)

  42. STORAGE COST FOR GRAIN: PHYSICAL COST FINANCIAL COST

  43. HEDGING TAKE AN OPPOSITE POSITION IN FUTURES AS YOU HAVE IN CASH PROTECTION FROM PRICE LEVEL CHANGES

  44. LOCALIZED FUTURES PRICE FUTURES PRICE MINUS ANTICIPATED BASIS

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