AGEC 420

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AGEC 420

• Markets
• TradeSim
• Hedged storage examples

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Open Position - MidAm Wheat

• Fri., Feb 15
• Bot 1 MidAm May Wheat _at_ 2.82 Sell stop _at_ 2.74½
• Close /-
• Fri., Feb 15 2.81 ¾ -2.50
• Fri., Feb 22 2.86 ¼ 42.50
• Fri., Mar 1 2.78 ½ -35.00
• Tue., Mar 5 2.82 -----
• Today ???

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TRADESIM

• Access
• from AGEC420 Homepage
• or just search the Web for TradeSim
• You should have received e-mail from ofor98 re
  Your New TradeSim Account
• Provides your username and password
• NB Change password on 1st use (under User
  Parameters)

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Trouble logging in

• Login is case sensitive!!
• Watch out for 1 vs I 0 vs o

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Simulation Parameters

• All traders start with 10,000
• Earn interest (6.25) on your uncommitted
• i.e., on not committed to your margin account
  
• Commissions -- 40
• Game ends when markets close Thurs., May 2

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TradeSim - How it operates

• Trades are not processed immediately
• You get the next available price, but TradeSim
  processes all trades (updates) in the evening
• Example
• You submit a trade Monday evening
• You get the next days (Tuesdays) opening price
• TradeSim will process it Tuesday evening
• You dont see the result until Tue night, Wed
  morning
• But can just check the market to find out what
  price you got

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TradeSim

• Incentives
• First Prize 50
• Second Prize 30
• Third Prize 20
• Based on Equity Balance at close of trade, May 2

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TRADESIM

• Initiate trading before Wednesday, March 13.
• (Considered as HW 5 5 points)

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TRADESIM

• N.B.
• Dont forget to LOG OUT

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Hedged Storage Examples

• Decision rule
• Store only if and as long as projected basis
  improvement gt storage cost

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St. Francis Basis
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Expected St. Francis Basis in Mid-March

• Cash KC Futures Basis
• 1996 4.86 5.20 -34
• 1997 4.08 4.30 -22
• 1998 3.17 3.46 -29
• 1999 2.57 2.97 -40

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Example St. Francis

• Wheat Aug 1, 1999
• Cash price, St.Francis, 2.25,
• March futures, 3.25
• Opening basis -1.00
• Expected March 1 basis -0.50 ??
• Projected improvement 0.50 ??

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Example (cont.)

• Cost of carry
• Storage costs per month 0.04
• interest costs per month 0.02
• (10 x 2.25 x 1/12)
• Total cost per month 0.06
• Cost for 7 months 0.42
• Decision Store and hedge by selling March
  futures
• Expected profit 0.50 - 0.42 8c/bu

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Example (cont.)

• December 1, 1999
• Cash price, St. Francis, 2.10
• March futures, 2.70
• Basis is -0.60
• Continue with hedged storage ??

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Re-evaluate on December 1

• Basis on Dec 1 -0.60
• Exp. Basis, March 1 -0.50
• ? Exp. strengthening from Dec. 1 to Mar. 1 is 10
  cents.
• AND Storage cost Dec 1 to Mar 1 (3 6c/mo)
  is 18 cents
• Decision? Sell grain now, lift hedge.

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Calculate Profit

• Cash
• Buy (own) on Aug 1 _at_ 2.25
• Sell on Dec 1 _at_ 2.10 ? Loss of 15c/bu on cash
• Futures
• Sell on Aug 1 _at_ 3.25
• Buy on Dec 1 _at_ 2.70 ? Profit of 55c/bu on futures
• Storage cost 4 mo _at_ 6c/mo 24c
• Profit 0.55 - 0.15 - 0.24 16c/bu

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Storage hedge

• Profit basis improvement storage cost
• Store only if and as long as projected basis
  improvement gt storage cost