Futures Contracts on commodities

Commodity futures Is a standaridized contract that calls for future delivery of a standard quantity of a commodity at a fix time, place and price, which is isued and traded in an exchange.

The specifications of a futures contract Underlying asset The contract size or Contract Unit Delivery arrangements Delivery month Price quotation The tick size Price limits Position limits

The specifications of a futures contract case of (case of Chicago SRW Wheat Futures Contract ) The underlying asset – it must be well defined, unambiguous, usually in the name of contract. Ex: Chicago SRW Wheat Futures Contract The grade and the quality of the commodity that underlines the contract. Ex. #2 Soft Red Winter at contract price, #1 Soft Red Winter at a 3 cent premium, other deliverable grades listed in Rule 14104 The Product code- under wich it can be identified on the market Ex: CME Globex: ZW, CME ClearPort: W, Clearing: W. The contract size, or contract unit – specifies the amount of the asset that has to be delivered under one contract. Ex. 5000 bushels. In some cases exchanges have introduced “mini” contracts to attract the small investors (ex: mini – sized Chicago SRW Wheat). Size of the contract is called “the notional principal ”

The specifications of a futures contract case of (case of Chicago SRW Wheat Futures Contract ) Delivery arrangement – it refers at the grade of asset that will be delivered and the delivery location if in the contract are specified alternatives. Delivery months – the precise period during the months when the delivery can be made. The exchange also specifies: when trading in a particular month’s contract will begin, the last day on which trading can take place for a given contract. Usually ar announced at the position Listed contracts. Ex. March (H), May (K), September(U), December (Z). Price quotation are realized in a way that is convenient and easy to understand. Ex: cent per bushel Tick size, or Minimum price fluctuation– the minimum price movement that can occur in trading. Is consistent with the way in which the price is quoted. Ex: 1/4 of one cent per bushel ($12,50) Daily price limits - are specified by the exchange. The exchange establish a limit up and a limit down. They are settled to prevent large price movements from occurring because of speculative excesses. Ex: outrights 0,30$ for 15 nov. 2017 Position limits – the maximum number of contracts that a speculator may hold. The purpose is to prevent speculators from exercising undue influence on the market.

The specifications of a futures contract case of (case of Chicago SRW Wheat Futures Contract ) Trading Hours – the period of time during the day and during the week when the contract can be transected. Ex: Sunday-Friday, 7:00 p.m. – 7.45 a.m. CT and Monday –Friday, 8:30 a.m.- 1:20p.m. CT Last delivery day – is established as second business day following the last trading day of the delivery month (CME case). Last trading day or Termination of trading – in our case is the business day prior the 15th calendar day of the contract month. Settlement Procedures – are established for each contract Settlement Method physical delivery, named Deliverable Offset position (round turn) Cash delivery

The margins Initial margin – the amount that must be deposited at the time the contract is entered into. Maintenance margin – the amount from the initial margin which have to maintained all time in the margin account Margin call – if the amount in the margin account fall under the level of maintenance margin the investor receives a margin call and he has to top up the margin account to the initial margin level next day. Marking to market – at the end of each trading day, the margin account is adjusted to reflect the investor’s gain or loss. The margin requirements are the same on short and long futures position.

The Clearinghouse The exchange Clearinghouse is an adjunct of the exchange and acts as an intermediary in futures transactions. The main task – to keep track of all the transactions that take place during the day, so that it can calculate the net position of each of its member. The members of the clearinghouse are required to maintain a margin account with the clearing house – the clearing margin. There is an original (initial) margin but no maintenance margin. The brokers who are not clearinghouse member must maintain a margin account with a clearinghouse member. To determine clearing margins the clearinghouse calculate the number of contracts outstanding on gross or net basis.

Determination of clearing margin The gross basis = total of long positions entered into by the clients + total short positions entered by the clients The net basis – allows long and short positions to be offset against each other Ex. A clearinghouse member has two clients: one with a long position in 35 contracts and another with short position in 25 contracts. Gross margining: The clearing margin would have as basis 35+25=60 contracts Net margining: The clearing margin would have as basis 35-25=10 contracts

Delivery Physical delivery The decision to deliver the underlying asset is made by the party with short position. The broker of the investor with short position issues a notice of intention to deliver to the exchange clearinghouse. The exchange choose a party with a long position to accept delivery. Usually is choused the party with the oldest outstanding long position. The critical days: The first (last) notice day – is the first (last) day on which a notice of intention to make delivery can be submitted to the exchange. The last trading day – is generally a few days before the last notice day.

Delivery Cash Settlement Is used because: is inconvenient the delivery of the underlying asset; is impossible the delivery of the underlying asset. When a contract is settled in cash, all outstanding contracts are declared closed on a particular day. The final settlement price is set equal to the spot price of the underlying asset at either the opening or close of trading on that day.

Newspaper quotes OPEN – the price at which contracts were trading immediately after the opening bell. HIGH – the highest price achieved during the day. LOW – the lowest price achieved during the day. SETTLE (settlement price) – the price used for calculating the daily gains and losses. Is usually the price at which the contract is traded immediately before the bell signaling the end of the trading day. CHG (change) – the change in the settlement price from the previous day. LIFETIME (HIGH, LOW) – the highest and the lowest price achieved by that futures contract over his lifetime. OPEN INTEREST – the total number of contracts outstanding. VOLUME TRADING – show the estimated volume of trading in contracts of all maturities and the actual volume of trading in these contracts.

Newspaper quotes in Financial Times for Wheat Futures Contracts Chicago Board of trade, August 15, 2017 Contract Settlement Price Day’s Change High Low Vol 000s Interest Jul 463.25 -1.25 469.00 462.00 10.25 42.7 Sep 481.50 -1.5 487.50 480.00 25.60 251.9 Dec 500.25 -0.75 505.00 498.00 15.10 175.3 Mar 517.00 -2.25 520.00 516.00 5.07 33.3 Jul next year 532.50 536.00 532.00 8.1 62.5 Total 64.12 565.7

Using foreign currency futures contracts Short position If the trader believes that the price of the underlying asset will fall down he will sell the futures contract. So he locks in the right to sell the underlying asset at the price set in the moment when he sold the contract (settled price). Long position If the trader believes that the price of the underlying asset will rise up he will buy the futures contract. So he locks in the right to buy the underlying asset at the price set in the moment when he buied the contract (settled price).