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MARKETING 101: LINGO! ... Marketing 101: Lingo! Futures & Options on Futures Basis Cash Markets . Questions/Comments? Extension is a Division of the Institute of Agriculture and Natural

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  • MARKETING 101:

    LINGO!

    Jessica Johnson – Asst. Extension Educator, Agricultural Economics Updated: 2/24/2014

    PLEASE READ THE INSTRUCTIONS ON YOUR CARD,

    DO NOT SHARE YOUR PRICE WITH ANYONE!

    WE WILL BEGIN SOON!!!

  • Market Lingo 101…

    Created with WORDLE

  • Marketing 101: Lingo!

    Futures &

    Options on

    Futures

    Cash Markets

  • Marketing 101: Lingo!

    Futures &

    Options on

    Futures

    Cash Markets

  • Futures

    Video http://bcove.me/o73u89sm

    01:20 – 2:30

    http://bcove.me/zonshves Videos by CME Group

    http://bcove.me/o73u89sm http://bcove.me/o73u89sm http://bcove.me/zonshves

  • Futures Markets

     An auction market in which participants buy and sell

    standardized future contracts.

     Hedgers are people who use the futures or options

    as a substitute for buying and selling the actual

    commodity

     Speculators try to make money buying and selling

    futures or options

  • http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contract_specifications.html

    http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contract_specifications.html http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contract_specifications.html http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contract_specifications.html http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contract_specifications.html http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contract_specifications.html http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contract_specifications.html

  • Market Commentary

    http://www.youtube.com/watch?v=zsz9ghRdQb4

    http://www.youtube.com/watch?v=zsz9ghRdQb4 http://www.youtube.com/watch?v=zsz9ghRdQb4

  • Futures Market January 29, 2014

  • Futures Market January 29, 2014

    Corn, March 2014

  • Futures Market January 29, 2014

    Volume = # of contracts traded each day

    Open Interest = # of contracts outstanding each day

  • Market Commentary

    “Safrina” Crop, is the 2nd Brazilian corn crop. Production from the second corn crop is destined for the export market. Video by Market Journal http://www.youtube.com/marketjournal

    http://www.youtube.com/marketjournal http://www.youtube.com/marketjournal

  • Ups and Downs

    Bullish Market – Up Market

    Bulls attack by thrusting horns up!

    Bearish Market – Down Market

    Bears attack by swiping paws down!

  • Market Commentary

  • Differences Between Contracts

    http://kneb.com/markets/market-quote.php?page=quote&sym=ZCl

    Rural Radio Network Market Quotes

    http://kneb.com/markets/market-quote.php?page=quote&sym=ZCl http://kneb.com/markets/market-quote.php?page=quote&sym=ZCl http://kneb.com/markets/market-quote.php?page=quote&sym=ZCl

  • Differences Between Contracts

     Carrying Charge – Price difference between the

    future delivery month and the near term month. It

    represents how much the market is offering

    producers to hold (carry) the grain until the distant

    month.

    Source: Dec. 23, 2010 Grain Transportation Report

  • Differences Between Contracts

    http://kneb.com/markets/market-quote.php?page=quote&sym=ZC

    Rural Radio Network Market Quotes

    Mar. – Dec = 0.108

    http://kneb.com/markets/market-quote.php?page=quote&sym=ZC http://kneb.com/markets/market-quote.php?page=quote&sym=ZC http://kneb.com/markets/market-quote.php?page=quote&sym=ZC

  • Differences Between Contracts

    http://kneb.com/markets/market-quote.php?page=quote&sym=ZC

    Rural Radio Network Market Quotes

    May – Dec. = 0.194

    http://kneb.com/markets/market-quote.php?page=quote&sym=ZC http://kneb.com/markets/market-quote.php?page=quote&sym=ZC http://kneb.com/markets/market-quote.php?page=quote&sym=ZC

  • Differences Between Contracts

     Small or negative carrying charge → sell

     Negative also called “Inverted”

     Lower demand in the future

     Large carrying charge → store

     More demand in the future

     The carrying charge must be larger than your

    estimated storage costs for you to hold the product until

    the later date!

  • Hedging

     Hedging buying/selling futures contracts to protect

    against loss due to changing cash markets.

     Taking a position in a futures market opposite the position

    held in the cash market

     Short – plan to sell a commodity

     protects the seller against falling prices

     Long – plan to purchase a commodity, protects the buyer

    against rising prices

  • Hedging

     Hedging buying/selling futures contracts to protect

    against loss due to changing cash markets.

     Short – plan to sell a commodity, protects the seller against

    falling prices

     Long – plan to purchase a commodity, protects the buyer

    against rising prices

  • Hedging…Buy Low, Sell High

    Sell Futures Contract Buy Futures

    Contract

    Sell Commodity in Cash Market

    Buy Futures Contract Sell Futures

    Contract

    Buy Commodity in Cash Market

    S h o rt

    Lo

    ng

    Place Lift Cash Move

  • Example…Short December Corn

    $5.00 Futures Price $4.00 Futures Price

    Place Hedge – SELL DEC ‘14 CORN Lift Hedge – BUY DEC ‘14 CORN

    Gain/Loss

    $1.00 Futures Gain

  • Options on Futures

    Video http://bcove.me/o73u89sm

    2:30

    Options give the buyer the right (or option) but not

    the obligation to exercise the contract.

    http://bcove.me/o73u89sm

  • http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contractSpecs_options.html

    http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contractSpecs_options.html http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contractSpecs_options.html http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contractSpecs_options.html http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contractSpecs_options.html http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contractSpecs_options.html http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contractSpecs_options.html

  • Put vs. Call Options

     Put Option – gives the buyer the right to sell a futures contract at a predetermined price (aka strike price) on or before an expiration date.

     Insurance against falling price

     Minimum price for your commodity

     Call Option- Give the buyer the right to buy a futures contract a specific price (aka strike price) on or before an expiration date.

     Insurance against rising prices

     Maximum price for your purchase

  • @CH14 C 4600

    Contract Call or Put Strike Price

    Price or Premium of the Option, not of the contract.

    You can find similar information here http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_quotes_globex_options.html

    http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_quotes_globex_options.html http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_quotes_globex_options.html http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_quotes_globex_options.html http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_quotes_globex_options.html http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_quotes_globex_options.html http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_quotes_globex_options.html

  • Call Option Put Option

    In-the-money Strike Price Futures price

    At-the-money Strike Price = Futures price Strike Price = Futures price

    Out-of-the-money Strike Price >Futures price Strike Price

  • Put vs. Call Options

    P U

    T

    Buy PUT and

    pay premium

    1. Offset: Sell PUT and get premium

    2. Exercise: SELL underlying futures contract

    3. Expire: Do nothing and lose premium

    BUY Back

    Futures

    SELL in

    cash

    market

    C A

    LL

    Buy CALL and

    pay premium

    1. Offset: Sell CALL and get premium

    2. Exercise: BUY underlying futures contract

    3. Expire: Do nothing and lose premium

    SELL Back

    Futures

    BUY in

    cash

    market

  • -$0.30 buy Premium

    +$13.00 sell cash

    $12.70 net gain

    You expect prices to fall.

    You buy a $12 strike price November soybean put option for a premium of $0.30.

    Prices rise.

    The November cash price is $13.

    Situation Expire

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