Introduction to the Futures Market

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Introduction to the Futures Market

• Ag. Econ. 160
• Dr. James Cothern

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The Marketing Manager and Risk Management
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Why Study The Futures Market?

• Futures Market a Laboratory Which Reacts to All
  Economic Phenomena
• Prices Respond to Many Differing Events, Futures
  Markets React Instantly
• Pricing Products and Locking in Costs For Profit
  are The Most Important Job in Marketing, Futures
  Offers Alternatives Available No Where Else
• Incorporates All You Have Learned in Economics

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Evolution of the Futures Market
Futures Market Today is an international
phenomena..Financial futures domminateWhy?
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The Role of the Exchange Today
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Futures vs. a Forward Contract
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Market Participants
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The Role of Hedgers and Speculators
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Participants Use Margin in Trading
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Characteristics of a Futures Contract
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Contract Specifics Commodities
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Contract Specifics Commodities (Cont.)
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Commodity Characteristics WSJ
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Daily Pricing Activity With Quotes

• Transactions or Trades Continue Throughout the
  Day
• Trades can vary through a great range of prices
  depending on how much volatility is in the market
• Exchanges Use a Series of Summary Terms to
  Explain this daily activity

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Futures Quotes Terms Used in Trading
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Reading a QuoteUnderstandingSettle and Change
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Understanding Cotton Quotes
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Understanding Corn and Soybean Quotes
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Understanding Live Cattle Quotes
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Types of Orders Traders Use in Trading
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Order Placement
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Order Placement The Game
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Order Types
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Duration of Orders
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A Speculative Trade Beth Bigbucks and Dennis
Deepocket
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Trade Example Beths Profits
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Trade Example Dennis Loss
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Why Do Cash and Futures Prices Differ?
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Convergence of Cash and Futures Prices
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Convergence Futures Above Cash
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Convergence Cash Above Futures
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Basic Hedge Cash Market Falls
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Basic Hedge Cash Market Rises
Perfect Hedge Affected by Zero Basis
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Hedge Example Cotton Zero Basis
A Perfect Hedge Because Cash and Futures
Were Exactly Equal at Time of Contract
TerminationGood for Exemplary Circumstances But
Unlikely
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Hedge Example Cotton Off Basis
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Hedge Example Cotton On Basis
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Incentives to Make or Take Delivery
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Long HedgePrice Rises, Zero Basis
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Long Hedge Price Falls, Zero Basis
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Risk Management Program Mandatory Today

• The Futures Market Today
• Diverse and Complex
• Financial futures dominate
• Trading in Eurodollars Interest rate risk
• Major Companies Hedge Many Types of Risk
• Airlines What Might They Wish to Hedge? How?
• Construction and developers What and How?
• Lenders What and How?
• What has happened recently with interest rates?

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Futures Market Glossary
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Summary
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Summary (Continued)