102 Applied Economics 3411/5411, 2018 Lecture Notes Copyright © 2018 Edward Usset. All rights reserved. 50,000 pounds for feeder cattle and 200,000 pounds for Class III milk. Minimum price (tick) fluctuations : 1/4 cent in grains, or $12.50 per contract. In live cattle and hogs, $.00025 per pound, or $10 per contract. In feeder cattle, $.00025 per pound, or $12.50 per contract. For Class III milk, $0.01 per cwt., or $20.00 per contract. Maximum daily price moves from the previous days close ("limit moves"): corn – 25 cents per bushel wheat – 35 cents soybeans – 60 cents live cattle – 3 cents per pound lean hogs – 3 cents per pound feeder cattle – 4.5 cents per pound Limits are established by the exchange and they can change. There is no limit in the spot month. The rationale behind setting limits is to (1) reduce the risk of default, and (2) allow traders more time to assess the importance of new market information. Contract deliverable grade : No. 2 Yellow Corn at contract price. No. 1 Yellow Corn can be delivered for a 1.5 cent per bushel premium, or No. 3 Yellow Corn at a 1.5 cent per bushel discount. Time of delivery : delivery occurs at the seller’s choice in the delivery month. They select: x time of delivery x contract grade or substitute x place of delivery Method of delivery : Shipping certificates are used for corn. Warehouse receipts are another method of delivery. Many new contracts in non-agricultural commodities specify cash settlement. Place of delivery : Several shipping districts in and around the Chicago area. Grain futures contracts generally have a par delivery point with alternative points deliverable at a discount or premium. Know your futures contract terminology! Nearby – the nearest active trading month of a futures contract. AKA lead or front month. Deferred – futures contracts being traded further from expiration than the nearby contract. These are also referred to as the back months.
103 Applied Economics 3411/5411, 2018 Lecture Notes Copyright © 2018 Edward Usset. All rights reserved. New crop – futures contract that represents the price of the new crop; December for corn, November for soybeans, July for HRW & SRW wheat, September for HRS wheat. Red – the contract one year out. For example, if today the Mar’19 contract is the nearby and red March refers to the Mar’20 contract. Volume of trade and open interest Consider the following example of a futures transaction: George sells two contracts (10,000 bushels) to Sally. Imagine that both players are new to the market, with no previous trades or market positions. George, the seller, is "short" 10,000 bushels - he is known as a " short seller. " Sally, the buyer, is "long" 10,000 bushels - she is called a " new buyer. " x each trader must deposit margin money to guarantee performance on the contract x after the trade, George and Sally deal only with the clearinghouse in gains and losses to their positions, which are "marked to market" each day x if the market falls 10 cents, Sally must deposit $1,000 with the clearinghouse and George will collect $1,000 from the clearinghouse Every trade generates trading volume. But not every trade represents "open interest," or an
- Spring '14
- Supply And Demand, Edward C. Usset