AGEC 420, Lec 21 Reminder:Assignment #1 to Include a futures price quote, e.g. …. KC July Wheat 3020.

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AGEC 420, Lec 21 Reminder:Assignment #1 to Include a futures price quote, e.g. …. KC July Wheat 3020 ($3.20/bu) on Jan 20 Apr Live Cattle closed at 7355 ($73.55/cwt) on Jan 20 and the source of the information, cc to Chrisy Cundiff Due: Friday, Jan. 25 (5 points)

AGEC 420, Lec 22 Video What did you learn? Market participants ? Purpose of futures markets ? Hedging – what is it ? Why hedge? Speculation – good or bad? Liquidity ??

AGEC 420, Lec 23 Prices:Kansas City Wheat July 2002 contract. Open High LowClose Change Fri: ???.?? Tue: Wed: see

AGEC 420, Lec 24 Same data - DTN (WA 336) July 2002 contract. High LowClose Change Fri: ???? -12 Tue: Wed:

AGEC 420, Lec 25 Same contract 2 years ago: July 2000 Contract. (as of Jan 2000) Open HighLowClose Fri: Tue: Wed:313.00

AGEC 420, Lec 26 More prices Contracts trade for several delivery months Wheat: July, Sep, Dec, Mar, May Tuesday – DTN for KW (KC Wheat) HighLowClose Change Mar: Mar: Jul:

AGEC 420, Lec 27 Livestock prices Tuesday – DTN for LC (Live Cattle) HighLowClose Change Feb: Apr: Jun: Note 6975  $69.75/cwt; BUT 6977  $69.77½/cwt

AGEC 420, Lec 28 Futures Contracts –what they are –compare to forward contracts –who uses futures –why

AGEC 420, Lec 29 Definition A futures contract: –is an agreement (a contract, a promise) between a buyer and a seller –that requires the seller to deliver and the buyer to accept delivery of: a specified amount of a specified commodity at a specified location –on some (specified) future date

AGEC 420, Lec 210 “Short” and “Long” Seller - is said to be “short the futures” or “short” Buyer - is “long the futures” or “long”

AGEC 420, Lec 211 History Grain markets –19th century, Chicago grew as a grain terminal –at harvest -- oversupply -- grain dumped – founding of the CBOT established a “year-round”market by trading “to arrive” (forward cash) contracts established quality standards

AGEC 420, Lec 212 Forward Contracts Advantages “assured” seller of a buyer and a price Disadvantages producer obliged to deliver performance not guaranteed not standardized –each item had to be negotiated –often difficult to find an opposite –not transferable

AGEC 420, Lec 213 Futures: Advantages vs. Forwards 1.Performance guaranteed –every buyer and every seller deposits “margin” money with the exchange –the exchange acts as a “middle-man” in every contract

AGEC 420, Lec 214 Futures Contracts -- Advantages 2. Standardized terms –quantity –quality –time –location Only thing negotiated is PRICE

AGEC 420, Lec 215 Standardized ----> Transferable Obligations to deliver or accept can be transferred or “offset”. How? By entering into a 2nd contract equal and opposite to the original.

AGEC 420, Lec 216 Exchanges –CBOT Chicago Board of Trade Corn, SRW Wheat, SoyBeans –CME Chicago Mercantile Exchange Livestock, Hogs, Currencies –KCBT Kansas City Board of Trade HRW Wheat, –MidAm MidAmerica Commodity Exchange Mini Contracts (CBOT, CME commodities)