Commodity Exchanges and Trade Centers.ppt

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					    Agribusiness Library




Lesson 060059
Commodity Exchanges and Trade Centers part 1
                                               1
Objectives
1. Explain the history of commodity exchanges.




                                           2
Terms
   cash transactions
   clearinghouse
   forward contracts
   miniature contracts
   time contracts
   to-arrive contracts
   trade centers



                          3
       What is the history of
      commodity exchanges?
Futures trading began in the 17th century in
Japan with the use of rice futures. Maintaining
a year-round supply of seasonal products and
agriculture crops was difficult, so futures
trading became a well-known tool to solve
these problems. In Japan, rice was stored in
warehouses and would be available for future
use.



                                                  4
       What is the history of
      commodity exchanges?
Warehouse holders would sell receipts against
the stored rice. The rice tickets became a kind
of general commercial currency. Rules were
developed and were eventually similar to the
current rules of American futures trading.




                                                  5
        What is the history of
       commodity exchanges?
A. Trade centers are locations where resources
   can be bought or traded. Historically, the first
   cities were located because they were able to
   provide people with necessary elements (e.g.,
   water, land, and protection) for survival.




                                                 6
       What is the history of
      commodity exchanges?
A. Trade Centers….necessary elements (cont’d)
  1. Water is the first necessary element. If there is
     water available in the form of a flowing source
     or an underground source, people can access
     it easily. This allows people to have a constant
     source of water for transportation, cooking,
     and various other uses. Water is necessary for
     survival, so it is important to have a
     dependable source.




                                                    7
       What is the history of
      commodity exchanges?
A. Trade Centers….necessary elements (cont’d)
  2. Accessible farmland was important in the early
      development of cities. To survive, a city must
      be able to feed its people. If farmers have
      nearby farmland, they will be able to produce
      food for cattle and people and distribute it
      easily.




                                                   8
       What is the history of
      commodity exchanges?
A. Trade Centers….necessary elements (cont’d)
  3. Protection is another consideration. People need
     protection from the elements of nature, so they
     need to settle in an area that is naturally
     protected or that has the resources to build
     protective areas. Many cities were formed in
     hillsides and heavily wooded areas for this
     reason.




                                                  9
        What is the history of
       commodity exchanges?
B. As more cities were formed, the location of
   other trade centers became a consideration.
   New cities or trade centers were built in areas
   between established trade routes. As a result,
   the existing trading was available.
   1. Early markets were based on cash transactions.
      Cash transactions are sales made when the
      product is delivered and paid for immediately.
      They were often referred to as “spot
      transactions” because the buyer was able to
      visually inspect the product before taking
      immediate possession.
                                                 10
        What is the history of
       commodity exchanges?
2. As trading centers became more established,
   many changes started to occur. Time contracts
   (agreements between buyers and sellers to trade
   before the product could be delivered) were used.
  a. The price was usually negotiated in advance of
     delivery when using time contracts. Many of these
     sales transactions created problems because when
     the product was finally delivered, there were
     disputes about quality, quantity, price, and credit.




                                                        11
        What is the history of
       commodity exchanges?
2. As trading centers became more established (cont’d)
  b. To solve these problems, rules were established
     and became codified bylaws in Europe in the 1300s.
     Current exchange settings continue to conduct
     business with strict codes to create fairness between
     buyers and sellers.




                                                       12
        What is the history of
       commodity exchanges?
3. As more trading took place, more problems arose.
  a. Many of the trading centers did not have adequate
     storage and transportation for growing deliveries.
  b. During different seasons, certain products developed
     shortages because of growing seasons, resulting in
     increased prices. Without adequate storage space, it
     was hard to avoid. This situation encouraged the
     increased use of futures contracts. The two common
     types were to-arrive and forward.




                                                      13
        What is the history of
       commodity exchanges?
The two common types were to-arrive and forward.
 To-arrive contracts state that delivery will be in a
   few days with the title passing from the seller to the
   buyer.
 Forward contracts state that delivery will be in a
   few days, but the title is not passed until delivery
   occurs.




                                                     14
         What is the history of
        commodity exchanges?
4. Storage of products became a big business. Many
   people built large storage facilities to store products
   and distribute them over a period of time.
   Because roads were being built, transportation was
   less of a problem, and distribution over a longer
   period of time helped to lower the price difference
   throughout the year.




                                                      15
       What is the history of
      commodity exchanges?
C. In 1848, the Chicago Board of Trade (CBT) was
   founded by 82 businessmen. They established
   rules to make traders accountable to the terms
   of the contracts being traded. The newly
   founded CBT also allowed a consistent place for
   people to trade. The New York Coffee,
   Cotton, and Produce Exchanges were
   started in the 1870s and 1880s.




                                              16
        What is the history of
       commodity exchanges?
1. In 1871, the CBT was destroyed in the Great
   Chicago Fire. It is believed that modern day
   contracts were traded as early as 1859, but the
   records were destroyed in the fire.
2. The CBT started a concept that is still used today.
   To buy a contract, a portion of the value was paid
   to insure that buyers would not back out of their
   contracts. With this new concept in place,
   defaulting on contracts meant losing the deposit
   money and the possibility of being sued in court.



                                                    17
        What is the history of
       commodity exchanges?
3. In 1926, the CBT established a clearinghouse for
   futures trades. The clearinghouse is a third party
   between traders that insures performance from all
   involved parties. Since the clearinghouse was
   established, no contracts have caused any trader to
   lose money because of the default of another
   contracting party.




                                                  18
        What is the history of
       commodity exchanges?
4. Early on, the CBT dealt with the trading of grains
   (e.g., oats, wheat, and corn). After World War II,
   many other contracts were added. Iced broilers,
   gold, and silver were traded along with the grains.
   In 1975, the first mortgage interest rate contracts
   were traded.
5. Currently, the CBT has contracts for gold, silver,
   U.S. Treasury bonds, U.S. Treasury notes, wheat,
   corn, oats, rough rice, and others. Anyone who can
   put a deposit down for part of the contract price is
   able to buy and sell at the CBT.


                                                    19
       What is the history of
      commodity exchanges?
D. The Chicago Mercantile Exchange (CME) began
   as the Chicago Butter and Egg Board in 1898.
   In 1919, the name was changed to the Chicago
   Mercantile Exchange.
  1. The first butter and egg contracts were traded
     there in 1919. Live cattle and hogs were added
     in 1964 and 1966, respectively. Many other
     contracts have been traded, including onions,
     potatoes, and scrap iron.




                                                20
        What is the history of
       commodity exchanges?
2. In 1972, the CME formed the International
   Monetary Market to trade foreign currencies
   a. As the exchange rates fluctuate in an uncertain
      world economy, international investors use the
      trading of foreign currencies for protection and
      profit.
   b. Some currencies the CME trades are the
                  Japanese yen, Brazilian
                  real, French franc, and the
                  Mexican peso.


                                                   21
        What is the history of
       commodity exchanges?
E. Midamerica Commodity Exchange (MCE): After
   the Civil War ended in 1868, the MCE was
   started. It specialized in miniature contracts
   — contracts like other exchanges trade only
   smaller. For instance, instead of trading a corn
   contract for 5,000 bushels at another
   exchange, someone could trade for 1,000
   bushels. The MCE merged with the CBT in
   1986.



                                                22
       What is the history of
      commodity exchanges?
F. Minneapolis Grain Exchange (MPLS): The MPLS
   was organized in 1881 to trade spring wheat
   futures and options. It is also a large cash
   wheat market. It currently trades barley, white
   wheat, spring wheat, white shrimp, and black
   tiger shrimp.




                                               23
        What is the history of
       commodity exchanges?
G. Kansas City Board of Trade (KCBT): The KCBT
   was formed in 1856. It started the first stock
   index futures and also trades western natural
   gas.
H. New York Mercantile Exchange (NYME): The
   NYME was founded in 1872. It has been the
   major force in developing energy-based futures
              and options. It trades platinum,
              silver, crude oil, unleaded gasoline,
              propane, electricity, and others.

                                               24
        What is the history of
       commodity exchanges?
I. New York Cotton, Citrus, Finex, and NYFE
   Exchange (NYCE): The NYCE was formed in
   1870. The citrus trading was added in 1966 to
   trade frozen orange juice concentrate. In 1985,
   financial futures and options were added.




                                               25
       What is the history of
      commodity exchanges?
J. The New York Coffee, Sugar, and Cocoa
   Exchange (CSCE): The CSCE was started in 1882.
   Sugar was added in 1914, and it merged with the
   New York Cocoa Exchange in 1979. Current
   trading includes sugar, coffee, cocoa, milk,
   cheese, butter, and others.




                                             26
Review
   What were the main resources at the first
    trade centers?
   What is a time contract and why was it
    needed?
   What is a clearinghouse? Who established
    the first clearinghouse for futures trades?
   What was the major force in developing
    energy-based futures and options?


                                                  27
    Agribusiness Library




Lesson 060059
Commodity Exchanges and Trade Centers part 2
                                               28
Objectives
2. Identify and describe the major commodity
   exchanges in the United States and around
   the world.
3. Distinguish between speculators and
hedgers, and define related terms.
4. Describe and demonstrate hand signals used
   on commodity trading floors.



                                          29
Terms
   day traders
   electronic traders
   floor brokers
   floor traders
   hedgers
   open outcry
   positions traders
   scalpers
   speculators
                         30
   What are some of the major
    commodity exchanges?
The largest exchange in the world was formed in
2007 when The Chicago Mercantile Exchange
(CME) and The Chicago Board of Trade (CBOT)
merged. This formed the CME Group Inc., which
is now the world’s most diverse exchange. The
global offices are in Chicago, New York, Houston,
Washington D.C., London, Hong Kong, Singapore,
Sydney, and Tokyo.



                                            31
   What are some of the major
    commodity exchanges?
A. The CME trades futures on just about anything.
   Products from all major asset classes are
   available for futures trading: foreign currencies,
   stock index products, interest rate and Treasury
   products, commodities, energy, metals, and
   weather and housing indexes. CME Globex is an
   electronic trading platform that offers trading
   continuously.




                                                 32
   What are some of the major
    commodity exchanges?
B. The New York Mercantile Exchange (NYMEX)
   became part of the CME Group Inc. during 2008
   and was to be fully integrated in 2009. The
   NYMEX was the world’s largest physical
   commodity future exchange. The New York
   Mercantile Exchange and Commodity Exchange
   (COMEX) were separate and had merged.




                                            33
   What are some of the major
    commodity exchanges?
C. Trading takes place at several locations around
   the world. The world of trading is rapidly
   changing with new electronic movements.
   However, there are a few minor exchanges
   compared to the CME Group Inc.
   1. The Winnipeg Commodity Exchange is in Canada.
      In 1999, it was the 41st largest futures and
      options exchange in the world.




                                               34
   What are some of the major
    commodity exchanges?
C. Trading takes place at several locations (cont’d)
   2. Initiatives in Mexico to develop an exchange have
      been introduced. However, no organized
      commodity futures exchange has yet been
      created.




                                                  35
   What are some of the major
    commodity exchanges?
C. Trading takes place at several locations (cont’d)
   3. The Tokyo Commodity Exchange Inc. (TOCOM) is
      the largest exchange in Japan. This exchange
      group has undergone major consolidation
      throughout the past 10 years.




                                                36
   What are some of the major
    commodity exchanges?
C. Trading takes place at several locations (cont’d)
   4. The London Commodity Exchange (LCE) merged
      with London International Financial Futures
      Exchange (LIFFE) in 1996. Currently, both are a
      part of the NYSE Euronext Group.
      a. The NYSE Euronext was created in 2007 with a
         merger between the NYSE Group (parent of the
         New York Stock Exchange) and Euronext.
      b. The NYSE Euronext provides exchanges in five
         countries. It offers trading, clearing/settlement
         in cash equities, equity interest, commodities,
         and currency/bonds.
                                                     37
   What are some of the major
    commodity exchanges?
D. The Commodity Futures Trading Commission
   (CFTC) was formed in 1974 to regulate all
   trading. It insures that business is legal and
   professionally carried out with all the exchanges.
   1. The Commodity Futures Trading Commission is
      regulated by the Department of Agriculture.
   2. It regulates the futures exchanges, brokerage
      firms, money managers, and commodity advisors.




                                                38
 What is the difference between
    speculators and hedgers?
What are some of the related terms?
The participants within futures and options
trading are important to understand. The
following is a brief description of the wide
variety of participants:




                                               39
 What is the difference between
    speculators and hedgers?
What are some of the related terms?
A. Hedgers can be agriculture producers or
   processors, mining companies, banks, and
   others who use futures or options as an
   alternative for buying or selling the actual
   commodity. Hedgers buy or sell contracts to
   offset risk associated with the changing prices
   within the cash market. These participants, a
   hog producer, a grain farmer, or a food
   processing company will manage price risk while
   having the ultimate goal as long-term price
   certainty.
                                             40
 What is the difference between
    speculators and hedgers?
What are some of the related terms?
B. Speculators can be investors, hedge-fund
   managers, banks, and others who accept price
   risk. They try to make money by buying and
   selling futures and options. Speculators try to
   predict what the markets will do (go up or
   down), the movement of the market, and the
   price direction. Speculators also provide the
   market liquidity.




                                               41
 What is the difference between
    speculators and hedgers?
What are some of the related terms?
B. The speculator group has grown and changed
   due to the introduction of electronic trading,
   which allows for more of a diverse population of
   traders instead of the traditional high net-worth
   individuals. The different types of speculators
   are the following:
   1. Position traders are individuals who hold on to
      a position for several days or weeks and tend to
      have an opinion about the general price trends.



                                                  42
 What is the difference between
    speculators and hedgers?
What are some of the related terms?
B. The different types of speculators (cont’d)
   2. Day traders are individuals who close out
      positions by the end of the trading day. This
      allows for no overnight margin calls.
   3. Scalpers are the traders who hold on to
      positions for a short time. This time period can
      be within a few minutes or even seconds, which
      has become a trend due to the increase of
      electronic traders.




                                                  43
 What is the difference between
    speculators and hedgers?
What are some of the related terms?
C. Floor traders are speculators who are buying
   and selling contracts on the floor.
D. Floor brokers are people who serve as agents
   for customers.
E. Electronic traders are individuals who rely on
   the information provided electronically to buy or
   sell futures and options.




                                                44
What common hand signals are used
 on the commodity trading floor?
A few common hand signals are used in trading
by floor traders. These signals allow traders to
communicate during open outcry (trading is
done publicly, so each trader has a fair chance
to buy and sell).




                                              45
What common hand signals are used
 on the commodity trading floor?
A. To buy contracts, the hand should be in a
   position with the palms shown inward and the
   number of fingers shown indicating how many
   contracts are desired for purchase. For example,
   three fingers should be shown with the palm of
   the hand in to buy three contracts.




                                              46
What common hand signals are used
 on the commodity trading floor?
B. To sell contracts, the hand should be in a
   position with the palms shown outward and the
   number of fingers shown indicating how many
   contracts are desired for purchase. For instance,
   four fingers should be shown with the palm of
   the hand out to sell four contracts.




                                               47
What common hand signals are used
 on the commodity trading floor?
C. If the price needs to be shown, the floor trader
   will exhibit his or her fingers in a sideways
   motion.




                                                48
Review

   What is the largest exchange in the world?
    When was it created?
   When and why was the Commodity Futures
    Trading Commission developed?
   How has electronic trading changed the
    speculator group?
   Demonstrate the hand signals learned in this
    lesson.


                                             49

				
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