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 © 2011 CME Group. All rights reserved 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 © 2011 CME Group. All rights reserved Lock-In A Price Clearing CME Group Role in Market Place: The Central Counterparty Clearing Model © 2011 CME Group. All rights reserved In An Uncertain World, We Provide Confidence © 2011 CME Group. All rights reserved • 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 © 2011 CME Group. All rights reserved 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 © 2011 CME Group. All rights reserved • • • • 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 © 2011 CME Group. All rights reserved 11 © 2011 CME Group. All rights reserved 12 CME Group Agriculture Products Volumes/Trends Source: CME Group Monthly Agriculture Update © 2011 CME Group. All rights reserved 14 Source: CME Group Monthly Agriculture Update © 2011 CME Group. All rights reserved 15 Source: CME Group Monthly Agriculture Update © 2011 CME Group. All rights reserved 16 © 2011 CME Group. All rights reserved 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 Source: CME Group Monthly Agriculture Update © 2011 CME Group. All rights reserved 18 CME Group Agriculture Products 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 © 2011 CME Group. All rights reserved 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 Contract Specifications Size: 5,000 bushels (136 metric tons) 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 © 2011 CME Group. All rights reserved Sunday - Friday Monday - Friday Soybean Futures Contract Specifications Size: 5,000 bushels (136 metric tons) 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 © 2011 CME Group. All rights reserved Sunday – Friday Monday - Friday CME Group Agriculture Products Hedging Intro Corn, Wheat, Soybean - Monthly Charts © 2011 CME Group. All rights reserved 25 Why Hedge? Where to Lock in A Price? Where to Lock in A Price? Source: CME Group E-Quotes © 2011 CME Group. All rights reserved 26 Quotes © 2011 CME Group. All rights reserved 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 © 2011 CME Group. All rights reserved 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 © 2011 CME Group. All rights reserved Terminology: Key Trade Role of Hedgers/Speculators Risk Transfer: Hedgers: trade to eliminate or reduce their market risk Speculators: trade to assume market risk © 2011 CME Group. All rights reserved 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. © 2011 CME Group. All rights reserved Futures Contract (Basic Definition) A standardized contract that LOCKS IN A PRICE for a FUTURE delivery. © 2011 CME Group. All rights reserved Soybeans – Long Hedge Example You run a livestock operation that uses 50,000 bushels of soybeans a year. How do manage feed costs? © 2011 CME Group. All rights reserved 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 © 2011 CME Group. All rights reserved 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 © 2011 CME Group. All rights reserved 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 © 2011 CME Group. All rights reserved 37 Basis (Premium) US Midwest Basis -Example © 2011 CME Group. All rights reserved 39 Basis (Premium) Cash Price - Futures Price = Basis © 2011 CME Group. All rights reserved 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 © 2011 CME Group. All rights reserved $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 © 2011 CME Group. All rights reserved $11.75/bu - 2.00/bu $9.75/bu OPTIONS FOCUS Who Wants to Lose Money? © 2011 CME Group. All rights reserved 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. © 2011 CME Group. All rights reserved Option Contract (Basic Definition) Contract that provides the RIGHT to a specific purchase or sale price for a future delivery. © 2011 CME Group. All rights reserved 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 © 2011 CME Group. All rights reserved 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 © 2011 CME Group. All rights reserved 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 © 2011 CME Group. All rights reserved 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 © 2011 CME Group. All rights reserved 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 © 2011 CME Group. All rights reserved Time Value Curve Time Value Decreases at an increasing rate Time value is zero at option expiration Time value Cents/bushel Days to expiration © 2011 CME Group. All rights reserved 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 © 2011 CME Group. All rights reserved 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 © 2011 CME Group. All rights reserved 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 © 2011 CME Group. All rights reserved Corn – Using Options Example You are feed compounder and need to buy corn for July delivery. How can you protect against rising corn prices? © 2011 CME Group. All rights reserved 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 © 2011 CME Group. All rights reserved 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 © 2011 CME Group. All rights reserved 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 ______ © 2011 CME Group. All rights reserved THANK YOU FOR YOUR PARTICIPATION IN THE WORKSHOP TODAY please contact us: Jeffry Kuijpers Jeffry.Kuijpers@cmegroup.com & Lisa Kallal Lisa.Kallal@cmegroup.com © 2011 CME Group. All rights reserved 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. © 2011 CME Group. All rights reserved 61