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L17Nov09.306 - Lec 17 Futures Markets FRE 306 Reference...

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Lec 17: Futures Markets FRE 306 Reference: Chapters 14-15, Ronald Shrimper, Economics of Agricultural Markets , Prentice Hall, 2001
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Lec 18: Futures Markets 2 What is a futures market? On futures markets, futures contracts are traded These contracts are like forward contracts that are standardized Forward contract is private undertaking between two individuals, negotiated to cover their own terms w.r.t. delivery date, place, financial terms, product quality Futures contract is standardized: all contracts in a commodity are the same. Contract for May delivery of corn is same among all traders, so can be easily transferred to others…only the price not specified Wheat, corn, soybeans, cattle, cocoa, coffee, oj Lumber, plywood, copper, gold, silver, financial contracts like treasury bills, currencies Contract types change over time: e.g., live hog contracts were terminated and replaced by lean hog carcass contract
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Lec 18: Futures Markets 3 What is a futures market? 2 A futures contract at a given exchange for a given commodity is completely the same except for the delivery date and the price at which the contract is bought or sold; no extra paragraphs or addendums can be added Futures contracts are obligations to provide or take delivery of a specified commodity of given quality at predetermined location. You can sell this obligation (promise) to deliver without ever owning the commodity Similarly, you could have a contract to accept delivery, and you can sell this promise too In fact, most people with futures contracts never have to deliver the commodity or take delivery because they sell the contract before it is due
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Lec 18: Futures Markets 4 What is a futures market? 3 If you purchase an obligation to sell a commodity and do not wish to actually do so, you can purchase an offsetting obligation to buy the commodity before the contract expiry date. Then you have cancelled your position.
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