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Risk_Management_Commodity_Futures by chenshu

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									 COMMODITIES
 FUTURES TRADING
                               RISK
                               MANAGEMENT




              Submitted by Darrell Boatright
Modified by Georgia Agriculture Education Curriculum Office
                         June 2007
           HISTORY

• Chicago Board of Trade established in
  1848 by 82 merchants who were
  frustrated over unstable prices and
  neglected forward contracts.
• Commodity futures contracts started
  being traded in 1865.
• Chicago Mercantile Exchange was
  established in 1919.
           MARKET

– Negotiable trade between a buyer and
  seller
FUTURES EXCHANGE
– A central market place with
  established rules and regulations
  where buyers and sellers meet to
  trade futures contracts.
Cash Vs Futures Market
       Trading
• In cash market, a physical
  commodity is exchanged in a buy
  and a sell agreement.
• In futures market, you are paper
  trading and don’t take physical
  possession of the commodity in
  most cases.
  TWO TYPES OF
FUTURES TRADERS
• HEDGER -
• an individual or company who offsets a
  cash market position by shifting some of
  the risk of adverse fluctuations in price, by
  buying or selling a futures contract.
• Example: a farmer plants his corn crop in March
  and immediately sells a September futures corn
  contract. In the fall he harvests the corn and
  sells it on the cash market. He then buys back
  his September futures contract. He locks in his
  price and avoids market fluctuations.
       SPECULATOR

• A market participant who tries to make a
  profit on buying or selling commodity
  futures contracts and assumes the majority
  of the risk from the hedger.
• Example: a person expects cotton to
  rally because of heavy rains in the
  Mississippi delta will damage the crop
  and cause harvest delays. He buys a
  Dec contract of cotton and prays!
          BASIS

• THE DIFFERENCE BETWEEN THE
  CASH MARKET PRICE AND THE
  FUTURES MARKET PRICE OF A
  COMMODITY.
       CONTRACTS

• FUTURES ARE TRADED IN CERTAIN
  CONTRACT MONTHS
• CONTRACTS ARE AT SPECIFIED
  AND PRE-DETERMINED AMOUNTS
• OWNER DOESN’T TAKE PHYSICAL
  POSSESSION OF COMMODITY
      OPTION FUTURES
        CONTRACT
•   A futures contract in which you have the
    right but not an obligation to exercise
    your option at a future date.
• Two types of option contracts:
• Put - an option contract that gains value when the
market price falls.
•Call - an option contract that gains value when the
       market price rises.
•Strike price - price you would like to receive for your
commodity minus the premium.

								
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