future - tusaf

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future - tusaf

CME Group
Grain/Oilseed Risk Management Intro
March 2011
Presented by CME Group Representatives
Jeffry Kuijpers and Lisa Kallal
Chicago
Mercantile
Exchange
(CME)
© 2011 CME Group. All rights reserved
Chicago
Board of
Trade
(CBOT)
New York
Commodity
Mercantile
Exchange
Exchange
(COMEX)
(NYMEX)
2
Global Distribution – CME Globex
Presence in More Than 85 Countries
Percentage of total
volume traded
outside of US
hours has
increased from
4% in 2003 to
14% today
• Nine telecommunications hubs in Amsterdam, Dublin, London, Milan,
Paris, Seoul, Singapore, Kuala Lumpur and Sao Paulo
3
True or False?
The notional value of a whole
year of trading at the New York
Stock Exchange is equivalent to
the notional value of three weeks
of trading at CME Group.
True or False?
CME Group Role in Market Place:
Discovered by
all market
participants
Price Discovery
FUTURES
Risk Management
Lock-In A Price
Clearing
CME Group Role in Market Place:
The Central Counterparty Clearing Model
In An Uncertain World, We Provide Confidence
•
Price transparency
•
Anonymous matching
•
Twice daily mark-tomarket
•
Zero debt system
•
Objective valuations
•
Clearing member oversight
•
Segregation of customer funds
•
$7B financial safeguards system
•
CME Clearing handles +98% of all
futures & options traded in the US
CME Group Product Complexes
Agriculture
Interest Rates
Foreign Exchange
Equities
Weather
Energy
Freight
(Precious) Metals
4,000 +
Listed
Contracts
CME Group Agricultural Product Line
Grain and Oilseeds
•
•
•
•
•
Corn
Wheat
Soybeans
Soybean Meal
Soybean Oil
Dairy Products
•
•
•
•
•
Palm Oil
Rough Rice
Oats
DDGS
Soybean Crush
Livestock & Forestry Products
•
•
•
•
Live Cattle
Lean Hogs
Feeder Cattle
Frozen Bellies
• Random Length Lumber
• Softwood Pulp
• Hardwood Pulp
Swaps & Financially-Settled Softs
•
•
•
•
Corn
Wheat
Soybeans
Corn Basis
•
•
•
•
World Raw Sugar
Arabica Coffee
Cocoa
Cotton
•
•
•
•
Class III Milk
Class IV Milk
Nonfat Dry Milk
Deliverable Nonfat Dry
Milk
• Dry Whey
• Cash-settled Butter
• Butter
• International
Skimmed Milk
Powder
Biofuels (Agri/Energy)
• Ethanol
• Biodiesel
Commodity Indexes
• DJ-UBS Commodity Index
• S&P-GSCI
• S&P-GSCI Excess Return Index
9
CME Group DVD
11
12
CME Group Agriculture Products
Volumes/Trends
Source: CME Group Monthly Agriculture Update
14
15
16
17
Percentage of Open Interest by Category
CBOT Wheat
60%
800
700
50%
600
40%
30%
400
300
20%
200
10%
100
Non-Reportable
0%
Non-Commercial
Commercial
Index
OI
0
Open Interest in Thousands
Percentage
500
18
Grain & Oilseed Contracts
Corn Futures
Contract Specifications
Size: 5,000 bushels (127 metric tons)
Pricing unit: cents/bu
Tick size: 1/4 cent/bu ($12.50 per contract)
Ticker symbol: Open auction (C) and Electronic (ZC)
Daily price limit: 30 cents/bu.
Contract months: Dec (Z), Mar(H), May(K), Jul(N), Sep(U)
Quality: #2 Yellow corn, other qualities can be delivered at premium/discount
Trading hours: Chicago time
 Electronic:
18.00 – 07.15
Sunday-Friday
 Open-auction: 09.30 – 13.15 Monday-Friday
Quiz Time
5,000 bushels or 1 contract of
wheat is equivalent to ____
metric tons?
a)
b)
c)
d)
127 metric tons
131 metric tons
136 metric tons
142 metric tons
Wheat Futures
Pricing unit: cents/bushel
Tick size: 1/4 cent/bushel ($12.50 per contract)
Ticker symbol: Open auction (W) and Electronic (ZW)
Daily price limit: 60 cents/bushel
Contract months: Jul(N), Sep(U), Dec(Z), Mar(H), May(K)
Quality: #2 Soft Red Winter Wheat, other qualities deliverable at premium/discount
Trading hours: (Chicago time)
 Electronic:
18.00 – 7.15
 Open-auction: 09.30 – 13.15
Sunday - Friday
Monday - Friday
Soybean Futures
Pricing unit: dollars & cents/bu
Tick size: $0.25/bu ($12.50 per contract)
Ticker symbol: Open auction (S) and Electronic (ZS)
Daily price limit: 70 cents/bushel
Contract months:Nov(X), Jan (F), Mar(H), May(K), Jul(N), Aug(Q), Sep(U)
Quality: #2 Yellow, other qualities can delivered at premium/discounts
Trading hours: (Chicago time)
Electronic:
18.00 – 07.15
Open-auction: 09.30 – 13.15
Sunday – Friday
Monday - Friday
Hedging Intro
Corn, Wheat, Soybean - Monthly Charts
25
Why Hedge?
Where to Lock in A Price?
Where to Lock in A Price?
Source: CME Group E-Quotes
26
Quotes
27
Quotes
^0 = 0/8 = 0
^2 = 2/8 = 1/4
^4 = 4/8 = 1/2
^6 = 6/8 = 3/4
‘0 = 0/8 = 0
‘2 = 2/8 = 1/4
‘4 = 4/8 = 1/2
‘6 = 6/8 = 3/4
WN11
831’6 = ?
$8.31 3/4
28
Terminology : Longs vs. Shorts
Long Position:
1) Inventory of product or 2) a purchased futures position
Short Position:
1) Unmet requirement for product or 2) a sold futures position
Terminology:
Key Trade Role of Hedgers/Speculators
Risk Transfer:
Hedgers: trade to eliminate or reduce their market risk
Speculators: trade to assume market risk
FOCUS ON FUTURES
Futures Contract
(Technical Definition)
Legally binding agreement to accept delivery of or make
delivery of a standardized quantity and quality of a commodity
to a standardized place in a standardized time period
for a price discovered in an organized futures exchange.
Futures Contract
(Basic Definition)
A standardized contract that
LOCKS IN A PRICE
for a FUTURE delivery.
Soybeans – Long Hedge Example
You run a livestock
operation that uses
50,000 bushels of
soybeans a year.
How do manage feed
costs?
34
Long Hedge Example # 1
(Rising Market)
CASH
FUTURES
Nov 10
Cash Forward
@ $10.00/bu
Long Mar
@ $10.00/bu
Feb 22
Buy Soybeans
@ $11.50/bu
Sell Mar
@ $11.50/bu
$1.50 Gain
Buy cash soybeans $11.50/bu
Futures gain
- 1.50/bu
Net Purchase Price $10.00/bu
Long Hedge Example # 2
(Falling Market)
CASH
FUTURES
Nov 10
Cash Forward
@ $10.00/bu
Long Mar
@ $10.00/bu
Feb 22
Buy Soybeans
@ $8.75/bu
Sell Mar
@ $8.75/bu
$1.25 Loss
Buy cash soybeans
$8.75/bu
Futures loss
+ 1.25/bu
Net Purchase Price $10.00/bu
Long Hedge Example: Locks In Soybean Price With Futures
Protected
Against
Higher Prices
Locked-In Price Level, $10/bu.
Price Already
Locked-In
No Opportunity
For Lower
Price
37
Basis (Premium)
US Midwest Basis -Example
39
Basis (Premium)
Cash Price - Futures Price = Basis
40
Long Hedge Example (Strengthening Basis)
(Rising Market)
CASH
FUTURES
BASIS
Nov 10
Cash Forward
@ $10.00/bu
Long Mar
@ $9.50/bu
+$0.50
Feb 22
Buy Soybeans
@ $11.75/bu
Sell Mar
@ $11.00/bu
+$0.75
$1.50 Gain
+$0.25
Buy cash soybeans
Futures gain
Net Purchase Price
$11.75/bu
- 1.50/bu
$10.25/bu
Long Hedge Example (Weakening Basis)
(Rising Market)
CASH
FUTURES
BASIS
Nov 10
Cash Forward
@ $10.00/bu
Long Mar
@ $9.50/bu
+$0.50
Feb 22
Buy Soybeans
@ $11.75/bu
Sell Mar
@ $11.50/bu
+$0.25
$2.00 Gain
-$0.25
Buy cash soybeans
Futures gain
Net Purchase Price
$11.75/bu
- 2.00/bu
$9.75/bu
OPTIONS FOCUS
Who Wants to Lose Money?
Option Contract
(Technical Definition)
Contract between two parties that
conveys a RIGHT but not an
obligation to buy or sell a specific
commodity at a specific price within a
specific time period for a premium.
Option Contract
(Basic Definition)
Contract that provides the
RIGHT
to a specific
purchase or sale price
for a future delivery.
Types of Options
CALLS
Buyer has the right to BUY
Seller has the obligation to SELL
PUTS
Buyer has right to SELL
Seller has the obligation to BUY
Example: Soybean Oil – Hedger Buys Calls
Long 45c Soybean Oil Call
Upside Risk
Protection
Cost of 2 Cents
Option Premium = 2.00 cents/lb.
45 cents
47 cents
Can Lose
Premium
Cover Cash Needs at
Lower Price
Example: July Corn Options
4.00 Strike - (30.5 Put – 24.5 Call) = 3.94 Futures
49
Options Have Two Components
1) INTRINSIC VALUE
2) TIME VALUE
Intrinsic Value + Time Value = Option Premium
*Option premium differs from premium (basis) on physical market
Terminology: Intrinsic Value
Amount of money that could be currently realized by exercising
an option with a given strike price. An option has intrinsic value if
it is currently profitable to exercise the option.
Example: Corn call option
Strike price
- Underlying futures price
$4.00
$4.20
Intrinsic Value
$0.20
Example: Corn put option
Strike price
- Underlying futures price
$4.20
$4.00
Intrinsic Value
$0.20
Time Value Curve
Time Value
 Decreases at an increasing rate
 Time value is zero at option expiration
Time value
Cents/bushel
Days to expiration
0
Terminology: Time Value
Two primary factors affecting time value are:
1) Length of time remaining until expiration.
2) Volatility of the underlying futures price.
Example: Soybean call option
Premium
$0.10
-Intrinsic Value
$0.08
Time Value
$0.02
Example 2: Soybean put option:
Sep soybean futures
$9.20
Sep $9.50 put @ premium $0.38
Time Value
$0.08
Intrinsic Value
$0.30
Option Expiration
zero time value after expiration
•Options have _______
•Options expire: month prior to the underlying futures
Unexercised futures options expire at 1900 (Chicago) on the last trading day
•Automatic exercise of options
Options with intrinsic value (in-the-money) on the last trading day will be automatically
exercised unless buyer requests not to
Exercise
•Only the option buyer
______ can exercise the rights
•A seller is randomly selected to fulfill the rights
Exercise Versus Offset
•Offset recovers both intrinsic and time value
•Exercise recovers only intrinsic value (remaining time value is lost)
•Exercise may have additional costs
•Exercise may have additional risks
Corn – Using Options Example
You are feed compounder
and need to buy corn for
July delivery.
How can you protect
against rising corn prices?
56
Options Example - Corn futures at $3.95/bu
Option Strike Price
Call Option Premium
$3.90
29’0
$4.00
24’4
$4.10
20’5
$4.20
17’2
$4.30
14’3
$4.40
12’0
Call
+ Premium
= Ceiling Price
$4.00
+$0.24 1/2
$4.24 1/2
57
Corn – Using Options Example, Part 2
Call
+ Premium
= Ceiling Price
$4.00
+$0.24 1/2
$4.24 1/2
Futures RISE to $4.50/bu., option can then be sold for at least an intrinsic value of $0.50.
(option premium will also likely rise.)
Intrinsic Value
- Premium
= Amount Saved
=Price Paid For Corn
$0.50
-$0.24 1/2
$0.25 1/2
$4.24 1/2
Futures FALL to $3.90/bu., options can then be left to expire or offset to receive any time value.
Cash Value
+ Premium
- Offset
= Price Paid For Corn
$3.50
+$0.24 1/2
-$0.04 1/2
$3.70
58
Option Pricing Review: Calculate Intrinsic & Time Value
Dec Wheat @ $6.10
Dec Wheat Puts
Dec Wheat Calls
Strike
Premium
Intrinsic
Time
Strike
Premium
Intrinsic
Time
6.00
.64
.10
_______
.54
______
6.00
.56
.00
_______
.56
______
6.10
.00
.64 3/4 _______
.64 3/4
______
6.10
.61 ½
.00
_______
.61 1/2
______
6.20
.56
.00
_______
.56
______
6.20
.67
.10
_______
.57
______
THANK YOU FOR YOUR PARTICIPATION IN THE
WORKSHOP TODAY
please contact us:
Jeffry Kuijpers
[email protected]
&
Lisa Kallal
[email protected]
Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a
leveraged investment, and because only a percentage of a contract’s value is required to trade,
it is possible to lose more than the amount of money deposited for a futures position. Therefore,
traders should only use funds that they can afford to lose without affecting their lifestyles. And
only a portion of those funds should be devoted to any one trade because they cannot expect to
profit on every trade.
The Globe Logo, CME®, Chicago Mercantile Exchange®, and Globex® are trademarks of
Chicago Mercantile Exchange Inc. CBOT® and the Chicago Board of Trade® are trademarks of
the Board of Trade of the City of Chicago. NYMEX, New York Mercantile Exchange, and
ClearPort are trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of
Commodity Exchange, Inc. CME Group is a trademark of CME Group Inc. All other trademarks
are the property of their respective owners.
The information within this presentation has been compiled by CME Group for general purposes
only. CME Group assumes no responsibility for any errors or omissions. Although every attempt
has been made to ensure the accuracy of the information within this presentation, CME Group
assumes no responsibility for any errors or omissions. Additionally, all examples in this
presentation are hypothetical situations, used for explanation purposes only, and should not be
considered investment advice or the results of actual market experience.
All matters pertaining to rules and specifications herein are made subject to and are superseded
by official CME, CBOT, NYMEX and CME Group rules. Current rules should be consulted in all
cases concerning contract specifications.
61

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