Chicago Mercantile Exchange

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Chicago Mercantile Exchange
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Chicago Mercantile ExchangeFounded in 1898 as
the Chicago Butter and Egg Board(Chicago Board
of Trade was chartered in 1848)
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By 1919 it was known as the Mercantile Exchange
1961 Introduced trading of frozen pork bellies
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Pork bellies, more commonly known as bacon, are
obtained from the underside of a hog. A hog has
two bellies, generally weighing about 8-18
pounds, depending on the hog's commercial
slaughter weight.
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In 1964 Live Cattle futures were introduced. The
first futures contract that is based on a
non-storable commodity.
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1972 - Introduced currency futures1981-
Eurodollar futures were introduced (Interest Rate
Futures)
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• 1982 Stock Index Futures (SP 500)2002 CME
  Converts from a Not -for-Profit Membership Entity
  to a for profit corporation.

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CME has four major product areasInterest
RateStock IndexesForeign ExchangeCommodities
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• LIVESTOCK FUTURES MARKETS

PRICE RISK
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• PRICE RISK
• INVENTORY
• UNKNOWN AND VARIABLE PRICES

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• LIVESTOCK PRODUCERS FACE RISK FROM
• PRICE OF THEIR PRODUCTS
• PRICE OF INPUTS

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Cattle Prices
Weekly Lean Hogs
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Lean Hog Prices
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Corn Prices
Weekly Corn
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• CHICAGO MERCANTILE EXCHANGE
• LIVE CATTLE
• LEAN HOGS
• FEEDER CATTLE
• PORK BELLIES

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• LIVE CATTLE
• CONTRACT SIZE 40,000 LBS
• DELIVERY MONTHS FEB, APRIL, JUNE, AUG, OCT, DEC
• HOURS OF TRADE 905 AM TO 100 PM
• LIMIT 3.00/CWT

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• LEAN HOG CONTRACTS
• CONTRACT SIZE 40,000 LBS
• DELIVERY MONTHS FEB, APRIL, JUNE, JULY, AUG,
  OCT, DEC.
• HOURS OF TRADE 910 AM TO 100 PM
• LIMIT MOVE 2.00/CWT

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• FEEDER CATTLE CONTRACTS
• CONTRACT SIZE 50,000 LBS
• DELIVERY MONTHS JAN, MARCH, APRIL, MAY, AUG,
  SEPT, OCT, NOV.
• TIME OF TRADE 905 AM - 100 PM

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• LEAN HOGS
• LIVE HOG CONTRACTS WERE REPLACED WITH LEAN HOG
  CONTRACTS IN 1996
• WHY? 70 OF U.S. HOGS ARE BOUGHT ON CARCASS BASIS

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• A LIVE ANIMAL YIELDS APPROXIMATELY 74, THUS A
  LEAN HOG VALUE IS EQUIVALENT TO THE LIVE HOG
  PRICE DIVIDED BY .74

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• SO IF LIVE HOGS ARE PRICED AT 40.00/CWT A LEAN
  EQUIVALENT WOULD BE 40/.74 54.00

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• HEDGING AND SPECULATION
• HEDGING -- TAKE AN OPPOSITE POSITION IN THE
  FUTURES AS YOU HAVE IN THE CASH MARKET.

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• THE BASIC PREMISE
• CASH PRICES AND FUTURES PRICES MOVE GENERALLY IN
  THE SAME DIRECTION

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• THUS A LOSS IN THE CASH MARKET WILL BE MADE UP IN
  THE FUTURES MARKET.

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• SPECULATION
• BUY LOW
• SELL HIGH

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• IT DOES NOT MATTER IN WHICH ORDER
• FUTURES MARKETS ARE ATTRACTIVE TO SPECULATORS
  BECAUSE
• A. MARGIN
• B. VOLATILITY

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• THE CURRENT MARGIN ON A LEAN HOG CONTRACT IS
  ABOUT 1000 (THE EXCHANGE SETS THE MINIMUM)

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• EXAMPLE
• APRIL HOGS ARE TRADING AT ABOUT 65/CWT
• 65/CWT X 40,000 LBS 26,000
• MARGIN IS ABOUT 4

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• MARGIN IS A PERFORMANCE BOND - INITIAL AND
  MAINTENANCE
• IF YOUR EQUITY DROPS BELOW MAINTENANCE LEVEL YOU
  MUST DEPOSIT MORE MARGIN

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• LIVESTOCK BASIS
• 1) LOCATION
• 2) QUALITY
• 3) FOR DEFERRED CONTRACTS -- ANTICIPATED SUPPLY
  AND DEMAND

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• HOGS
• CURRENT CASH 59.50
• APRIL FUTURES 57.55
• JUNE FUTURES 66.40
• JULY FUTURES 66.33
• OCTOBER FUTURES 55.17

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BASIS OVER TIME
PRICE DIFFERENCES

0
-
TIME
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WHY MUST CASH AND FUTURES COME TOGETHER?
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WHY MUST CASH AND FUTURES COME TOGETHER?

• ARBITRAGE BETWEEN THE FUTURES AND THE CASH