Introduction to the Futures Market Ag. Econ. 160 Dr. James Cothern

The Marketing Manager and Risk Management 11/28/2018 Introduction to the Futures Market

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 11/28/2018 Introduction to the Futures Market

Evolution of the Futures Market “Futures Market Today is an international phenomena..Financial futures domminate…Why? 11/28/2018 Introduction to the Futures Market

The Role of the Exchange Today 11/28/2018 Introduction to the Futures Market

Futures vs. a Forward Contract 11/28/2018 Introduction to the Futures Market

Introduction to the Futures Market Market Participants 11/28/2018 Introduction to the Futures Market

The Role of Hedgers and Speculators 11/28/2018 Introduction to the Futures Market

Participants Use Margin in Trading 11/28/2018 Introduction to the Futures Market

Characteristics of a Futures Contract 11/28/2018 Introduction to the Futures Market

Contract Specifics: Commodities 11/28/2018 Introduction to the Futures Market

Contract Specifics: Commodities (Cont.) 11/28/2018 Introduction to the Futures Market

Commodity Characteristics: WSJ 11/28/2018 Introduction to the Futures Market

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 11/28/2018 Introduction to the Futures Market

Futures Quotes: Terms Used in Trading 11/28/2018 Introduction to the Futures Market

Reading a Quote:Understanding“Settle” and “Change” 11/28/2018 Introduction to the Futures Market

Understanding Cotton Quotes 11/28/2018 Introduction to the Futures Market

Understanding Corn and Soybean Quotes 11/28/2018 Introduction to the Futures Market

Understanding Live Cattle Quotes 11/28/2018 Introduction to the Futures Market

Types of Orders Traders Use in Trading 11/28/2018 Introduction to the Futures Market

Introduction to the Futures Market Order Placement 11/28/2018 Introduction to the Futures Market

Order Placement: The Game 11/28/2018 Introduction to the Futures Market

Introduction to the Futures Market Order Types 11/28/2018 Introduction to the Futures Market

Introduction to the Futures Market Duration of Orders 11/28/2018 Introduction to the Futures Market

A Speculative Trade: Beth Bigbucks and Dennis Deepocket 11/28/2018 Introduction to the Futures Market

Trade Example: Beth’s Profits 11/28/2018 Introduction to the Futures Market

Trade Example: Dennis’ Loss 11/28/2018 Introduction to the Futures Market

Why Do Cash and Futures Prices Differ? 11/28/2018 Introduction to the Futures Market

Convergence of Cash and Futures Prices 11/28/2018 Introduction to the Futures Market

Convergence: Futures Above Cash 11/28/2018 Introduction to the Futures Market

Convergence: Cash Above Futures 11/28/2018 Introduction to the Futures Market

Basic Hedge: Cash Market Falls 11/28/2018 Introduction to the Futures Market

Basic Hedge: Cash Market Rises Perfect Hedge: Affected by Zero Basis 11/28/2018 Introduction to the Futures Market

Hedge Example: Cotton Zero Basis A “Perfect” Hedge Because Cash and Futures Were Exactly Equal at Time of Contract Termination…Good for Exemplary Circumstances But Unlikely 11/28/2018 Introduction to the Futures Market

Hedge Example: Cotton “Off” Basis 11/28/2018 Introduction to the Futures Market

Hedge Example: Cotton “On” Basis 11/28/2018 Introduction to the Futures Market

Incentives to Make or Take Delivery 11/28/2018 Introduction to the Futures Market

“Long” Hedge:Price Rises, Zero Basis 11/28/2018 Introduction to the Futures Market

“Long” Hedge: Price Falls, Zero Basis 11/28/2018 Introduction to the Futures Market

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? 11/28/2018 Introduction to the Futures Market

Futures Market Glossary 11/28/2018 Introduction to the Futures Market

Introduction to the Futures Market Summary 11/28/2018 Introduction to the Futures Market

Introduction to the Futures Market Summary (Continued) 11/28/2018 Introduction to the Futures Market