Chicago Board of Trade

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Futures Contract Employing Cash Settlement

• Chicago Board of Trade
• Municipal Bond Index
• 30-day interest rate
• Chicago Mercantile Exchange
• SP 500 Index
• Feeder Cattle
• Nikkei 225
• Eurodollar

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Price, Volume and Open Interest
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Price

• Unlike cash market, the futures market limits the
  daily price movements for most contracts.
• For corn, futures price can move up or down by no
  more than 10 cents in either direction from the
  previous days settlement price

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How Prices are quoted?

• Grains are quoted in cents per bushel.
• 250/bushel of corn 340 per bushel of wheat
• Copper is quoted in cents per pound in New York
• Cattle and hogs are quoted in cents per pound
• Gold

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How prices move?

• Minimum price fluctuation (also knows as tick) is
  a function of how prices are quoted and is set by
  the exchange.
• For example Minimum price fluctuation for corn
  is 1/4cents/bushel. If the price of corn is
  3.00/bu, the next price tick can either be
  3.001/4(if up) and 2.993/4(if down).
• However, prices can move more than a tick at a
  time, and can jump from 3.00 to 3.001/2.
• In case of grains and soybeans a minimum price
  fluctuations is ¼ cents.

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Volume and Open Interest

• Volume is a measure of trading activity.
• Open interest is a measure of open contract, that
  is, contracts that have not been offset.

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Trading Intermediaries
Members
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The Exchange

• Exchange Provide a place for trading to take
  place as well as provide rules and procedures for
  trading.
• Exchanges do research on new contracts, modify
  the existing contracts and also provide
  educational programs.
• Exchanges do not engage in futures trading.
• All the major futures and options exchanges are
  nonprofit organizations.
• Nine major exchanges in U.S.

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Major U.S Exchanges

• Chicago Board of Trade
• Chicago Mercantile Exchange
• New York Mercantile Exchange
• Coffee, Sugar, Cocoa Exchange
• New York Cotton, Citrus and NYFE Exchange
• Mid America Commodity Exchange
• Kansas City Board of Trade
• Minneapolis Grain Exchange
• Philadelphia Board of Trade

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Chicago Board of Trade

• Oldest among all the exchanges.
• During early years, CBT focused on the grains
  (oats, wheat and corn).
• After World War II, several other contracts such
  as iced broilers, gold, silver, plywood were
  added.
• In 1957, interest rate contract was added.
• Current futures contract exist for corn, oats,
  wheat, rough rice, gold, silver, U.S. Treasury
  bonds, U.S. Treasury notes, Long-term municipal
  bonds.
• www.cbt.com

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Chicago Mercantile Exchange

• CME began in 1898 as the Chicago Butter and Egg
  Board.
• Officially changed to the Chicago Mercantile
  Exchange in 1919.
• Currently trade more than 50 different Contracts
  butter, eggs, live cattle, hogs, feeder cattle
  lean hog pork bellies foreign currencies, gold,
  interest rate contracts.
• www.cme.com

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Mid-America Commodity Exchange

• MCE got started after civil war ended in 1868.
• It specializes in mini contracts
• Example Trade grain contract of 1,000 bushels
  rather than 5,000 bushels in CBT. Likewise,
  20,000 lbs live cattle contract versus 40,000 lbs
  in CME.
• Currently, trades contracts in corn, oats, wheat,
  soybeans, soybean oil and meal, live cattle,
  gold, silver, platinum, foreign currencies
• www.mce.com

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Other Exchanges

• KCBT Trades hard red winter wheat and innovated
  early grain sorghum futures.
• www.kcbt.com
• MPLS Trades spring wheat futures and options and
  is also a large cash market.
• In 1987, added contract on high fructose corn
  syrup.
• www.mpls.com

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Ag. Commodities Traded in these markets
CBOT
CBT
CME
Lean hog
Feeder cattle
Pork bellies
Live cattle
Cheddar cheese
Boneless beef
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Membership in Exchange

• Limited number of seats in each exchange.
• Members can be either individual or organization.
• Seats are bought and sold through negotiations.
  An individual desiring a seat must be purchased
  one from an existing member.
• During last few years, most exchanges have
  allowed members to lease their seats to another
  individual for certain period of time.

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Reasons to Purchase a seat

• To engage in floor trading activities.
• To have the right to execute trades at reduced
  commissions.
• It is also an investment.

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Regulating Futures and Options Trading

• Commodity Futures Trading Commission has the
  broad authority to regulate all futures and
  options trading including exchanges, traders and
  the terms of trading.
• The CFTC does not regulate cash and forward
  contract markets.
• National Futures Association is a self
  regulatory association. The CFTC requires most
  people associated with trading to be registered
  with CFTC and be a member of the NFA.

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Clearinghouse

• An organization which assures the financial
  integrity of futures markets by guaranteeing
  obligations among its clearing members

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Functions of Clearinghouse

• Reconciles futures transactions.
• Members of an exchange provide daily reports to
  the clearinghouse containing details of all
  futures trades, which clearinghouse then matches
  (shorts against longs) to provide a daily
  reconciliation.
• Guarantees financial integrity of future trading.
• Tabulates daily gains and losses and collect the
  net losses from clearing members and pays them
  over to clearing members with net gains.

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Functions of Clearinghouse
Without a Clearinghouse
Funds
Buyer
Seller
Contracts
With a Clearinghouse
Contracts
Buyer
Seller
Clearing- house
Funds
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Selecting a Broker
Types of Brokers
Full Service brokerage
Discount brokerage
Factors to consider while selecting a broker
Fee Charged
Fee Charged
Length of time in the profession
Knowledge of the market
Reputation of the firm
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The Margin
Margin is the proportion of contracts face value
to be deposited with the broker before you
control a futures contract. Normally, it varies
from 5 to 10 percent of the contracts face
value. Two types of margin Initial
margin Maintenance margin Example You buy a
December soybean futures contract for 4 per
bushel. The face value of the contract is
40,000. Margin required to control the futures
contract is 4000. In addition, you need to
maintain the margin level to retain the control
of the contract. Example
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Margin

• Purpose To assure performance, i.e., to
  guarantee that both long and shorts ultimately
  meet their contractual obligations
• Level of margin depends on the price volatility
  of the commodity that underlies the futures
  contract

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Type of Orders

• Two important components of order Time and
  Price.
• Time Component
• Kill and Fill Order If any part cannot be filled
  the entire order is canceled.
• Example You issued an order to buy two February
  Gold at 450. If only one can be bought at 450,
  the whole order is killed.
• Open or Good till canceled It remains effect
  until canceled by you or until the contract
  expires.
• You can also specify the time and date of the
  orders you place.

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Type of Orders

• Another component of the order is the price.
• Market order vs Limit order
• Market order means to fill the order at the best
  possible current market price.
• A limit order must be specified with a below
  current market price if the order is a buy or
  above the current market price if the order is a
  sell.

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Type of Orders

• Market-if-touched order Very similar to the
  limit order except that they become market
  order the moment that the price reaches the
  specified price.
• Buy two February gold at 445 limit is not same
  buy two February gold at 445 market-if-touched.

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Type of Orders

• Another useful order is Stop. You can use a
  stop order to protect your profit or to limit
  your loss, called a stop-loss order.
• Lets assume that you have a February gold
  purchased at 450. The current price of February
  gold is 458. If you want to protect your profit,
  you could issue a sell one February gold at 455
  stop. The order will be executed as soon as price
  drops to 455.
• On the other hand, you could use the stop loss
  order to prevent large losses from accumulating.

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Type of Orders

• Various types of orders can be combined as you
  become more sophisticated with your investing.