Futures Products - Commodities RSS Feed

The Concept of Futures

CME Group — Thu, 02 Oct 2008 08:34:00 EST

Key Points:

1.A futures contact is a standardized agreement stating the commodity, quantity, quality and delivery point or cash settlement.
2.Price is discovered in futures trading by the interaction of buyers and sellers, representing supply and demand, from all over the country and around the world.
3.Sellers remove their obligation to deliver on a sold contract by buying back a contract before the delivery date.
4.Buyers remove the obligation to take delivery on a purchased contract by selling back the contract before the delivery date.
5.A short hedge protects the seller of a commodity against falling prices.
6.A long hedge protects the buyer of a commodity against rising prices.

Who's Who in the Futures Markets

CME Group — Thu, 02 Oct 2008 08:20:00 EST

Key Points:

1.Commodity exchanges provide the location, electronic marketplace and rules for trading.
2.CME Clearing acts as the seller to every buyer and the buyer to every seller. It also is the central depository of required good-faith deposits (performance bonds) that act to guarantee contract performance by all parties.
3.Everyone who trades futures must have an account with a futures brokerage.
4.Hedgers transfer risk to speculators, who take on risk in pursuit of profit.

The Development of Contract Specifications

CME Group — Thu, 02 Oct 2008 08:19:00 EST

Key Points:

1.Futures contract specifications are developed to reflect industry standards.
2.Futures contract specifications change over time to reflect changing industry standards.
3.It is important to know how your livestock compare to the specifications of the CME Group contracts.

The Importance of Basis

CME Group — Thu, 02 Oct 2008 08:18:00 EST

Key Points:

1.Basis is the cash market price minus the futures price at the completion of production.
2.For a short hedger, the more positive (stronger) the basis, the higher the price received for livestock.
3.For a long hedger, the more negative (weaker) the basis, the lower the price paid for livestock.
4.Knowing the expected basis enables a hedger to translate a futures price into an expected local cash price. The hedger can compare that to the expected break-even price and decide whether or not to hedge.

The Short Hedge

CME Group — Thu, 02 Oct 2008 08:17:00 EST

Key Points:

1.A short hedge protects a livestock seller against falling prices.
2.Selling livestock futures helps to lock in a sale price for livestock to the extent that basis turns out as expected.
3.A short hedge is completed by simultaneously buying back the futures contracts and selling the livestock in the cash market.
4.If prices fall, the lower cash price is offset by a gain in the futures market.
5.If prices rise, the loss in the futures market is offset by a higher cash market price.
6.Realized basis determines how advantageous the hedge results are.

Locking in a Selling Price - Selling Futures Contracts

CME Group — Thu, 02 Oct 2008 08:16:00 EST

Key Points:

1.Before selling futures contracts it is necessary to deposit a performance bond.
2.Until the futures contract is sold, the contract holder may have to meet performance bond calls.
3.Brokers charge commission for each contract sold and bought back.
4.With a short hedge, the expected selling price is the futures price plus the anticipated basis.

The Long Hedge

CME Group — Thu, 02 Oct 2008 08:15:00 EST

Key Points:

1.The long hedge protects the livestock buyer against rising prices.
2.Buying futures contracts allows you to lock in a purchase price for your livestock.
3.You complete the long hedge by selling back the futures contracts and buying the livestock in the cash market simultaneously.
4.If prices rise, the higher cash purchase price is offset by a gain in the futures transaction.
5.If prices fall, the loss in the futures market is offset by a lower cash market purchase price.
6.With a long hedge, it’s the realized basis that determines how advantageous the hedge results are.

Locking in a Purchase Price - Buying Futures Contracts

CME Group — Thu, 02 Oct 2008 08:14:00 EST

Key Points:

1.Purchasing a futures contract requires a performance bond deposit.
2.Until the futures contract is offset, the holder of the contract will have to meet all performance bond calls.
3.The broker will charge a commission for each contract bought and sold back.
4.With the long hedge, the expected purchase price is the futures price plus the expected basis.

How a Hedging Account Works

CME Group — Thu, 02 Oct 2008 08:13:00 EST

Key Points:

1.All futures traders must deposit a performance bond to guarantee against losses incurred in the futures markets.
2.When an account balance falls below the maintenance level, the account holder must deposit additional money to bring the account back up to the original balance
3.Short futures positions improve when the futures price falls below their selling price and worsen as the price rises above the selling price.
4.Long futures positions improve when the futures price rises above the buying price and worsen as the price falls below the buying price.

Options on Livestock Futures

CME Group — Thu, 02 Oct 2008 08:12:00 EST

An option is a choice. It is the right, but not the obligation, to buy or sell something – in this case, a futures contract – at a specific price on or before a certain expiration date. There are two different types of options: puts and calls. Each offers opposite pricing alternatives. Each offers an opportunity to take advantage of futures price moves without actually having a futures position.

How Options Work

CME Group — Thu, 02 Oct 2008 08:11:00 EST

Key Points:

1.An option gives the buyer the right, but not the obligation, to buy or sell a futures contract.
2.Speculators and hedgers are the two types of traders in the futures and options markets.
3.Options are traded at exchanges such as CME Group, where they trade through open outcry and on CME Globex.
4.Buyers and sellers ultimately establish the price or premium of an option. Volatility, time to expiration and the relationship of the futures price to the strike price are the major factors that affect option prices.
5.Option contracts are standardized and one option equals one futures contract in quantity and quality.

Which Option to Buy?

CME Group — Thu, 02 Oct 2008 08:10:00 EST

Key Points:

1.It is essential to know break-even costs in order to determine profits or losses.
2.Basis is used to translate a futures or options quote into a price that is meaningful to a hedger’s business.
3.Puts are used by short hedgers to protect against falling prices. Calls are used by long hedgers to protect against rising prices.
4.No one strike price is right for everyone. The level of protection or insurance desired determines which strike price is right.
5.The three alternatives after purchasing an option are: selling it back, letting it expire or exercising it.

Establishing a Minimum Sale Price for Livestock - Buying Put Options

CME Group — Thu, 02 Oct 2008 08:09:00 EST

Key Points:

1.Purchasing a put option establishes a floor price for a sale of livestock.
2.Rolling up to a higher strike price can be used as a follow-up strategy to purchasing a put.

Establishing a Maximum Purchase Price - Buying Call Options

CME Group — Thu, 02 Oct 2008 08:08:00 EST

Key Points:

1.Purchasing a call option establishes a ceiling price for purchase of your livestock.
2.Rolling down to a lower strike price can be used as a follow-up strategy to purchasing a call.

Opening a Hedging Account

CME Group — Thu, 02 Oct 2008 08:07:00 EST

Key Points:

1.A full-service broker provides market information and advice as well as placing trades for customers.
2.A discount broker takes orders and places trades for customers, and may provide limited services.
3.Commissions depend on level of service and quantity traded.
4.A hedge broker should have hedging experience and be familiar with agriculture.
5.Lenders should understand the mechanics of hedging.

Types of Futures Orders

CME Group — Thu, 02 Oct 2008 08:06:00 EST

Key Points:

1.A market order will be filled promptly at the best possible price.
2.A price order to sell is filled at the stated price or above; a price order to buy is filled at the stated price or below.
3.A stop order to sell is placed below the market and is filled at the stated price or below.
4.A stop order to buy is placed above the market and is filled at the stated price or above.
5.A stop close only order is a stop order that is filled during the last minute, or less, of trading.

Points to Successful Hedging

CME Group — Thu, 02 Oct 2008 08:05:00 EST

Key Points:

1.Cost of production
2.The futures and options contract specifications
3.Knowledge of local basis
4.Knowledgeable lenders and brokers
5.Specific, written marketing objectives
6.Discipline

Anticipating the August 12th USDA Crop Report

CME Group — Sun, 24 Aug 2008 12:12:00 EST

Grain & Oil Seed: Anticipating the August 12th USDA Crop Report

A New Era for Grains and Oilseeds

CME Group — Sun, 24 Aug 2008 12:11:00 EST

Grain & Oil Seed: A New Era for Grains and Oilseeds

2008 Corn, Soybean and Wheat Market Prospects

CME Group — Sun, 24 Aug 2008 12:09:00 EST

Grain & Oil Seed: 2008 Corn, Soybean and Wheat Market Prospects