Standard Terms in a Futures Contract

1
Standard Terms in a Futures Contract

• Quantity
• Quality
• Expiration Months
• Delivery Terms
• Delivery Dates
• Minimum Price Fluctuations (tick)
• Daily Price Limits
• Trading Hours

2
CBOT Corn Futures Contract

• 5,000 bushels
• No. 2 Yellow at par and substitutions at
  differentials established by the exchange
• March, May, July, September, December
• Warehouse Receipt in Chicago, Toledo or St.
  Louis.
• Last delivery day is the last business day of the
  delivery month.
• 1/4 cent (12.50 per contract)
• 12 cents (600 per contract)
• 930 a.m. - 115 p.m. Chicago time, Mon-Fri.
  Trading in expiring contracts closes at noon on
  the last trading day. Project A overnight
  session hours are from 900 p.m. -430 a.m.
  Chicago time, Sun-Thu

3
Buying a Futures Contract

• Long Position
• Agreement to Accept Delivery of the Commodity in
  the Delivery Month and Pay the Contracted Price

4
Selling a Futures Contract

• Short Position
• Agreement to Make Delivery of the Commodity in
  the Delivery Month and Receive the Contracted
  Price

5
Ways a Contract Can Be Settled

• Settlement through Delivery (longs accept
  delivery from shorts).
• Cash Settlement in delivery month (if defined in
  the contract).
• Exchange for Physicals (EFPs)
• Offset - take opposite, but equal position in the
  futures market.

6
Offsetting a Futures Contract

• Today Sell 1 Dec Wheat _at_ 2.85
• Obligation to deliver wheat at a CBT approved
  warehouse in December and will be paid 2.85 (?
  delivery discounts).
• October 30 Buy 1 Dec Wheat _at_ 3.00
• Obligation to accept wheat at a CBT approved
  warehouse in December and will pay 3.00 (?
  delivery discounts).
• The two contracts cancel each other, the trader
  settles the price difference of 15 cents.

7
Example of Cash Settlement

• Basic Formula Price (BFP) Milk
• Cash Settlement against the USDA announced BFP
  for the month.
• June 1 Buy 1 July BFP Milk Futures 13.14 cwt
• August 5 July BFP Announced by USDA 13.59
• Contract is cash settled at 13.59 and the trader
  is paid 45 cents.

8
Clearinghouse

• Guarantees all contracts
• Assures that each trader honors contract
  obligations.
• Assumes opposite position to every traders
  position.
• A buyer to every seller
• A seller to every buyer.
• Facilitates delivery.

9

• Larry Long
• Buy 1 Dec Corn _at_ 2.20

Sally Short Sell 1 Dec Corn _at_ 2.20
Clearinghouse Sell 1 Dec Corn _at_ 2.20 to Larry
Long Buy 1 Dec Corn _at_ 2.20 from Sally Short -No
net position for the clearinghouse
10
Clearinghouse

• Requires margin funds for each position.
• Margin a small sum of money which serves as a
  performance bond on the contract.
• Profits and losses on a futures position are paid
  daily (marked-to-market) in reference to the
  settlement price.

11
Margin

• Initial Margin - amount of money a trader must
  post to the clearinghouse for taking a position
  in the futures market.
• Maintenance Margin - Minimum balance that must be
  maintained by a trader.
• Margin Call - When margin balance falls below
  maintenance margin. Enough funds must be sent to
  bring margin balance back to initial margin.

12
Margin Requirements per Contract

• Commodity Initial Maint. Contract Value
• Corn 540 400 11,500 (5)
• Wheat 675 500 14,000 (5)
• Soybeans 1,000 800 22,500 (5)
• L. Cattle 600 450 26,000 (2)
• F. Cattle 1,000 750 34,000 (3)
• Hogs 1,200 900 18,000 (7)
• Pork Bellies 1,700 1,300 21,000 (8)

13
Margins and Marking-to-Market

• Sell 1 Nov. Soybean futures contract at 4.75.
  Initial margin1,000 and maintenance margin800
• Day Settlement Price Profit Margin Balance
• 1 4.75 0 1,000
• 2 4.70 250 1,250
• 3 4.72 -100 1,150
• 4 4.76 -200 950
• 5 4.81 -250 700
• gt Margin Call on Day 5 of 300 to bring margin
  balance to initial level

14
Traders Brokers

• Floor Trader
• Independent
• Broker
• Futures Commission Merchant (FCM)
• Introductory Broker/Account Exec (IB)
• Commodity Trading Advisor (CTA)
• Commodity Pool Operator (CPO)

15
Full Membership Prices (8/13/99)

• CBOT 578,000
• NYMEX 560,500
• CME 345,000
• NYBOT 113,000
• KCBT 73,000
• MGEX 14,000
• MIDAM 4,500

16
Speculators

• On-floor versus Off-floor
• Scalpers
• Day Traders
• Position Traders
• Spread Traders
• Fundamental Analysis vs. Technical Analysis

17
Futures Markets Regulators

• Brokers
• Exchange/Clearinghouse
• National Futures Association (NFA)
• Commodity Futures Trading Commission (CFTC)

18
Broker Regulation

• Broker represents his/her customers to the
  exchange and clearinghouse
• Ensure customer activities are proper
• Know your customer

19
Futures Exchange

• Establish and enforce trading rules for members
• Exchange rules prohibit
• Prearranged Trading
• Front Running
• Does self-regulation work?

20
National Futures Association (NFA)

• Screening and testing applicants for registration
  (Series III - National Commodity Futures Exam)
• FCM, IB, CTAs and CPOs are required to be
  registered with the NFA
• NFA can audit, suspend or expel registrants for
  infractions.

21
Commodity Futures Trading Commission (CFTC)

• Government agency responsible for regulating the
  futures industry.
• Approval of new contracts.
• Price limits and delivery.
• Price manipulation.
• SEC vs CFTC