1. Futures Marketing Section II Mechanics of Futures Trading

2. Price Discovery Buyers and sellers interacting with information to arrive at a price through negotiation.

3. Futures Market Price A source of what buyers and sellers think a commodities worth, at some point in the future, today.

4. Futures Contract A transferable agreement to make or take delivery of a standardized amount of a commodity of minimum quality during a specific month. Every contract identical except for price.

5. Terms of a contract Commodity Price Quantity Quality Time of Delivery Place of Delivery Terms of Payment

6. Additional Terms Related to the Futures Contract Price Quotations and Price Fluctuations Maximum Daily Price Change (limit move) Volume of Trade End of Delivery Month Trading Suspension Bearish Bullish

7. Delivery Months Basis for Selection Natural Climatic Months Concentration of Volume of Trading Inertia

8. Settlement of a Futures Contract Delivery  Short - make deliveryLong – take delivery Offsetting Transaction  Reversing position with offsetting contract, if you were short in the market you would buy a contract.

9. Mechanics of Delivery NOI – Notice of Intent to deliver short position First Notice Day – Sent by short position to oldest long position Delivery Day- Retendering-

10. Functions of the Clearing House Reconciliation of all futures contracts Assuring the financial integrity of all transactions

11. Characteristics of Clearing House Separate from exchange Membership is very limited, must be members of the exchange Requirements for membership are stringent Stock Corporation Members must deposit substantial money

12. Notice of Intent Scenario A B CD E short LS L Clearing House

13. Concept of Long and Short Long ------------- Buy Short -------------Sell

14. Open Interest 1 long + 1 short = 1 open contract

15. Open Interest Example A sells to B A- Short B- Long C sells to B A- ShortB-Long 2 contractsC- Short Open Interest = 2Volume = 4

16. Volume and Open Interest CBOT November Soybeans as of Friday

17. Volume and Open Interest CBOT January Soybeans as of Friday

18. Selecting a Brokerage House Broker with Experience Knowledge of Commodity Convenience Willingness to Service Account

19. Purpose of Margin Secure Position of Trader Solvency of Clearing House They take opposite sides of transaction

20. Margin Accounts Separate for each customer Audited frequently – see if posted properly and not being used Commission House cannot use money Amount can vary from one brokerage house to another Does not pay interest

21. Initial Margin –amount you must post at origination of contract Sell Contract – post $3,000 margin for soybeans. (5 to 15 % of contract) What happens if price goes up? Contract Losing Money Effective Margin has been eroded. When the EM reaches the call point you must post new margin money to bring you account back to the original level of margin.

22. Example -- Margin Call Sell November Soybeans at $7.00 must post margin of 10 % of contract value. Post Margin of 10 % of ($7 * 5,000 bushels) Margin posted $3,500, call point is $2,000 If price increases to $7.40 what is the effective margin? EM = $1,500, EM < Call Point must post new margin monies.