Becoming Familiar With the Futures Market Unit: SAE/Commodities Marketing Job: Becoming Familiar With the Futures Market

What are cash markets? “A cash market refers to a physical location where a product or service is bought or sold for cash.” “A cash market refers to a physical location where a product or service is bought or sold for cash.” Examples of Cash Markets: Examples of Cash Markets: Grain elevatorsGrain elevators Clothing storesClothing stores Wal-MartWal-Mart Grocery StoresGrocery Stores

What is the futures market? The Futures Market is a centralize market where buyers and sellers of commodities trade special contracts called futures The Futures Market is a centralize market where buyers and sellers of commodities trade special contracts called futures Examples of Futures Markets are: Examples of Futures Markets are: Chicago Board of TradeChicago Board of Trade Chicago MercantileChicago Mercantile Kansas City Board of TradeKansas City Board of Trade

“Moisture below normal: supply of corn to decrease.” Limited rainfall out here on the plains could decrease the supply of corn, increasing the already high prices. As a cattle producer, this headline reads disaster for you because you’re already paying way more to feed your cattle than expected, decreasing your profit margin. You’ve looked into alternative feeds, but nothing seems to give you the same feed to gain ratio as corn. Since the farmer’s almanac doesn’t show any moisture coming in the near future, you decide to buy a corn futures contract before the price of corn goes even higher. Why might a producer turn to the futures market and Why might a producer turn to the futures market and what are some of the benefits and challenges? what are some of the benefits and challenges?

What are the Functions of the Futures Market? 1. Provide 1. Provide an efficient and effective mechanism for the management of price risk. 2. Provide 2. Provide an efficient mechanism for price discovery. 3. Provide 3. Provide a source of information for decision making. 4. Provide 4. Provide a means for firms to secure additional operating capital.

Describe the different futures market participants. Traders Speculators Speculators TradersTraders who buy or sell futures contracts to make a profit HasHas no desire to actually own the physical commodity AssumeAssume price risk and add liquidity and capital to the futures markets Hedgers Hedgers UseUse futures market for price protection by offsetting price change risk in the cash market by taking an equal, but opposite position in the futures market

Who is the third participant? Brokers Brokers A company or individual that executes futures and options orders on behalf of financial and commercial institutions and/or the general publicA company or individual that executes futures and options orders on behalf of financial and commercial institutions and/or the general public

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