Futures Level 2

Agenda

• Who and what drives the Futures market?

• Why trade• When to trade• How to trade using orders intelligently • Good trading habits

What drives the Futures market?

•Weather•Relative values of currencies•News •Politics

Why trade?•Speculation

–Taking advantage of volatility for profit•Hedging

–Covering exposure of physical harvest–Reducing corporate, foreign trade liabilities–Portfolio diversification - A fundamental element of risk management

When to trade: Speculation

Released on 9/12/07 For wk 9/7 2007 Crude oil

inventories (weekly change)

Actual -7.0 M barrels

Here we see how a negative number in the oil inventories caused the price of

oil to move 2 dollars in only a few hours=

When to trade: Hedging

Strategy: In order to eliminate his commercial risk he sells futures contracts equal to the amount of wheat he has produced.Thus, he is selling 20 futures contracts.(5,000 Tons pr contract x 20 contract = 100,000 bushels)

Result:• If wheat prices increases he is making money on the wheat

in his barn.• If wheat prices drops he is making money on his futures

contracts.

A farmer growing wheat with a yearly production of 100,000 bushels has a commercial risk of falling wheat prices. Using futures contracts, he is able to hedge against this risk.

When to trade continued…• Because futures contracts, by definition will eventually reach a

value date, it is important to know when each contract expires.• All this information is available via out online resource centre

First notice, online expiry and Expiry date are all shown for each contract

Trading made simple…Buy and sell at market

Costs: •Nominal value of trade•Initial margin•Maintenance margin

Market depth

Order window for entering or exiting the market

Using orders intelligently• Order types

– Limit – Market– Stop– Stop Limit– Trailing stop

• Orders can be placed in the– Trade modules– Order module– Account Summary

Entry/Exit

orders

A 3-way order

Take profit order

Stop-loss order

Entry/Buy

Good trading habits• Discipline!• Set long-term goals• Don’t overextend your finances and manage your margins• Diversify, portfolio management• Trade with your head, not with your heart• Trade your plan: If you fail to plan, you plan to fail. Stick to your

strategy. Plan the trade, trade the plan.• Manage your positions and orders diligently

Thank you