COMMODITIES FUTURES TRADING

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COMMODITIES FUTURES TRADING

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• RISK
• MANAGEMENT

Submitted by Darrell Boatright Modified by
Georgia Agriculture Education Curriculum
Office June 2007
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HISTORY

• Chicago Board of Trade established in 1848 by 82
  merchants who were frustrated over unstable
  prices and neglected forward contracts.
• Commodity futures contracts started being traded
  in 1865.
• Chicago Mercantile Exchange was established in
  1919.

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MARKET

• Negotiable trade between a buyer and seller

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FUTURES EXCHANGE

• A central market place with established rules and
  regulations where buyers and sellers meet to
  trade futures contracts.

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Cash Vs Futures Market Trading

• In cash market, a physical commodity is exchanged
  in a buy and a sell agreement.
• In futures market, you are paper trading and
  dont take physical possession of the commodity
  in most cases.

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TWO TYPES OF FUTURES TRADERS

• HEDGER -
• an individual or company who offsets a cash
  market position by shifting some of the risk of
  adverse fluctuations in price, by buying or
  selling a futures contract.
• Example a farmer plants his corn crop in March
  and immediately sells a September futures corn
  contract. In the fall he harvests the corn and
  sells it on the cash market. He then buys back
  his September futures contract. He locks in his
  price and avoids market fluctuations.

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SPECULATOR

• A market participant who tries to make a profit
  on buying or selling commodity futures contracts
  and assumes the majority of the risk from the
  hedger.
• Example a person expects cotton to rally because
  of heavy rains in the Mississippi delta will
  damage the crop and cause harvest delays. He buys
  a Dec contract of cotton and prays!

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BASIS

• THE DIFFERENCE BETWEEN THE CASH MARKET PRICE AND
  THE FUTURES MARKET PRICE OF A COMMODITY.

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CONTRACTS

• FUTURES ARE TRADED IN CERTAIN CONTRACT MONTHS
• CONTRACTS ARE AT SPECIFIED AND PRE-DETERMINED
  AMOUNTS
• OWNER DOESNT TAKE PHYSICAL POSSESSION OF
  COMMODITY

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OPTION FUTURES CONTRACT

• A futures contract in which you have the
• right but not an obligation to exercise
• your option at a future date.

• Two types of option contracts
• Put - an option contract that gains value when
  the
  
  market price falls.
• Call - an option contract that gains value when
  the
• market price rises.
• Strike price - price you would like to receive
  for your commodity minus the premium.