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Junior and Senior level Ag Bus. | |Colorado Agribusiness Curriculum

|Section: |Advanced Agribusiness |

|Unit: |Marketing |

|Lesson Title: |The futures market |

|Colorado Ag Education Standards| |

|and Competencies |AGB11/12.04 - The student will understand the influences of agricultural economy and its influences on the |

| |overall economy. |

| | |

| |AGB11/12.04.13 - Understand the futures market. |

| | |

|Colorado Model Content |English Standard 1: Students read and understand a variety of materials |

|Standard(s): | |

| |English Standard 4: Students apply thinking skills to their reading, writing, speaking, listening, and viewing |

| | |

| |English Standard 5: Students read to locate, select, and make use of relevant information from a variety of |

| |media, reference, and technological sources. |

|Student Learning Objectives: | |

| |Student will be able to (SWBAT) define the futures market and its functions and understand the functions of the |

| |futures exchange. |

| |SWBAT define a futures contract and understand its standardized terms and how it is traded. |

| |SWBAT describe the different futures market participants. |

| |SWBAT understand the clearing house and margins. |

| |SWBAT describe the difference between short and long contracts. |

| |SWBAT describe carrying charges. |

|Time: |One 50 Minute Class |

|Resource(s): | |

| |Marketing Grain & Livestock, 2nd Edition, by Gary F. Stasko, Iowa State University Press, ISBN 0-8138-2957-7 |

| | |

| | |

| |Strategies for Great Teaching, by Mark Reardon and Seth Derner, ISBN 1-56976-178-7 |

|Instructions, Tools, Equipment,|Italicized words are instructions to the teacher; normal style text is suggested script. |

|and Supplies: |Computer |

| |Projector |

| |Copies of worksheet and Quizzes |

| |Paper |

| |Pencils |

| |Lesson Plan |

|Interest Approach: |How many of you have ever heard of the Chicago Board of Trade or the Chicago Mercantile? What do these entities |

| |do? Why were they created? Give students a chance to browse (Chicago Board of Trade) or |

| |(Chicago Mercantile exchange) take the next five minutes to look at the Chicago Board of Trade and/or the Chicago|

| |Mercantile Exchange and note the things that you find interesting or questions that you have. After five |

| |minutes: Ok please return to your seats. Is there anyone that would like to share his or her notes about the |

| |two stock markets? Catch these notes on the board to be answered through out this lesson. Excellent job!! Thank|

| |you every one that shared. We will answer these questions and investigate these observations through out the |

| |lesson today. |

|Objective 1: |Define the futures market and its functions and understand the functions of the futures exchange. |

| |Defined: The process of trading futures contracts and operating the facilitates that market many Ag products. |

| |Functions of the futures market. |

| |Provide an efficient and effective mechanism for the management of price risk. |

| |Provide and efficient mechanism for price discovery. |

| |Provide a source of information for decision making. |

| |Provide a means for firms to secure additional operating capital. |

| |Purpose of Futures Exchanges. |

| |To bring together in a central place a large number of buyers and sellers. |

| |To establish and enforce trading rules and standards. |

| |To settle disputes. |

| |To collect and disseminate marketing information to the public. |

|Objective 2: |Define a futures contract and understand its standardized terms. |

| |Futures contracts Defined: |

| |A legally binding commitment to make or take delivery of a standardized quantity and quality of a commodity at a |

| |predetermined place and time in the future, for a price determined by auction in the trading pit of an exchange. |

| |Price is determined by open outcry. The benefit to determine price by open outcry is that it is competitive |

| |price discovery. |

| |There are two ways that a futures contract can be settled. Either by delivery or by offsetting. Less than 1% of|

| |all contracts traded are delivered on. Offsetting means to do the opposite of what you had previously done. If |

| |you had previously bought a contract, you sell it back. If you had sold one, then you buy it back. |

| |Standardized Terms of Futures Contracts. |

| |All terms for a futures contract are standardized, EXCEPT the price. The price again is found by open outcry in |

| |the trading pit. The standardized terms include the following: |

| |Delivery month – month of contracts. For example: March, May, July, September, December. |

| |Contract Size – Unit size of the contracts. For Example: Grains are 5000bu; Feeder cattle are 50000lbs and live|

| |cattle (fat Cattle) are 40000lbs. |

| |Place of Delivery – if delivered on the par delivery point. |

| |Minimum Price fluctuations – minimum movement in the price – for example: ¼ cent in grains. |

| |Maximum Daily Price Move – Maximum it can move in one day – for example 30 cents in wheat. |

| |Think, Pair, Share |

| |Break students into groups of two and have them decide who is number one and who is number two. Then when you |

| |say go the number two students will listen while the number one person has one minute to talk about the first two|

| |objectives. Then have them switch roles and repeat. |

|Objective 3: |Describe the different futures market participants. |

| |Market Participants |

| |There is a difference between traders and brokers. |

| |Traders buy and sell contracts for him or her self – does not take customer orders. |

| |Brokers take customers orders; may trade for him or her self, but first responsibility is his customers. |

| |We can classify the people who are the futures market participants into several different categories. The |

| |general public that trades would be in the last two categories: Either public speculators or hedgers. |

| |Floor brokers: Fill orders for outside speculators and hedgers. |

| |Professional Speculators: trade for own accounts. |

| |Scalpers – buys and sells minute by minute. |

| |Pit traders – take larger positions and hold for longer, but usually not overnight. |

| |Floor traders – take large positions and hold for several days. |

| |Hedgers: Producers or users of commodities who seek protection against adverse price changes by taking a futures|

| |position opposite to cash position. |

| |Public speculators: Place orders with brokers to profit from anticipated price changes. Not necessarily |

| |interested in owning the commodity, but only in profiting off movements in the price. |

|Objective 4: |Understand the clearinghouse and margins. |

| |Clearing House |

| |Assumes the opposite side of every trade so that all connections between buyers and sellers are served. |

| |Because the number of buys = number of sells, the clearing house has no net position. |

| |Margins |

| |To trade you must have an account. |

| |With every new trade, traders must deposit money called margin. |

| |Margins serves as a deposit. |

| |Initial margin: Initial deposit paid. |

| |Maintenance Margin: Minimum amount of money that must be kept in accounts. |

| |Margins are NOT a COST for trading futures. Your margin money is a deposit in your account and if your trade is |

| |not a losing trade, you will still have your margin money. |

| |The clearing house “marks-to-market” all open positions at the end of a day to adjust all accounts. |

| |Margin Call – when the equity in the traders account falls below the maintenance margin level |

| |Must then deposit enough funds to bring the equity in the account back to the initial margin level. |

|Objective 5: |Describe the difference between short and long positions. |

| |The term to sell is also known as a short position. To be short means that you are trying to protect the |

| |commodity in your possession from falling prices. Producers are generally sellers of short position holders. |

| |The term to buy is also known as a long position. To be long means that you are trying to protect the purchase |

| |price of a commodity that you plan on obtaining from rising prices. Mills, Factories, and packers would be long |

| |position holders. |

| |Short = Sell = Protect from falling prices = producer |

| |Long = Buy = protect from increasing prices = Mills, factories, packers. |

| |Simple rule = Buy Low and Sell High in either order. |

|Objective 6: |Describe carrying charges: |

| |Carrying Charge = the difference in the prices from one futures contract to another. |

| |Normal Market = is nearby price is lower than the distant contract price – so prices increase into the future. |

| |It reflects the cost of storage. For example, if the nearby month is Dec and the Dec price is 2.32 and the March|

| |price 2.39 and the May price is 2.44 and the July Price is 2.48 and the Sept price is 2.57 then the market is |

| |normal. |

| |Is common when supplies are large. |

| |Tells the trader what the market will pay for storage. |

| |Futures price spreads rarely reflect full carrying charge. |

| |Inverted Market = nearby prices are higher than distant contract prices – So prices decrease into the future. It|

| |reflects a negative price of storage. In other words, we are in short demand of the product so the market price |

| |is telling you that they will pay a premium if the product is delivered now – do not store the product until |

| |later. For example, if Dec is the nearby month again, but this time the Dec price is 2.32, the March price is |

| |2.28, the May price is 2.20, the July price is 2.16, and the Sept price is 2.10, now the market is inverted. |

| |Usually prevails when supplies are small. |

| |Market says they will pay a premium if you deliver now. |

| |Reflects negative price of storage. |

|Review/Summary: |Now You Should Be Able To: |

| |Define the futures market and its functions and understand the functions of the futures exchange. |

| |Define a futures contract and understand its standardized terms. |

| |Describe the different futures market participants. |

| |Understand the clearing house and margins. |

| |Describe the difference between short and long contracts. |

| |Describe carrying charges. |

|Application--Extended Classroom|Have students look at and find the standardized terms for certain commodities and present them to |

|Activity: |the class. |

|Application--FFA Activity: |Have students start on commodity challenge. |

|Application--SAE Activity: |Have students find the standardized terms for their SAE production and follow the market for a commodity of SAE |

| |production. |

|Evaluation: |PowerPoint worksheet |

| | |

| |Quiz |

| |Define the futures market. |

| |What are the four main functions of a futures market? |

| |What are the four main functions of a futures exchange? |

| |What is a futures contract? |

| |Price is determined by _______________ |

| |What is open Out Cry? |

| |What are the two ways a futures contract can be settled? |

| |What are the five standardized terms of a futures contract? |

| |Who are the participants in the Futures Market? |

| |What is a clearinghouse? |

| |What is the purpose of the clearinghouse? |

| |What is a Margin? |

| |What is a Maintenance Margin? |

| |What is a Short Position? |

| |Who is most likely to take a Short Position? |

| |What is a Long Position? |

| |Who is most likely to take a Long Position? |

| |What is a Normal Market and give an example of a Normal Market? |

| |What is an Inverted Market and give an example of such a market |

| |What is the simple rule to follow when making trades on the futures market? |

|Evaluation Answer Key: |See PowerPoint for work sheet answers. |

| |Quiz |

| |The futures market is defined as market trading futures contracts and operating the facilitate the marketing of |

| |many Ag products |

| |The four main functions of a futures market are: |

| |Provide an efficient and effective mechanism for the management of price risk. |

| |Provide and efficient mechanism for price discovery. |

| |Provide a source of information for decision making. |

| |Provide a means for firms to secure additional operating capital. |

| |The four main functions of a futures exchange: |

| |To bring together in a central place a large number of buyers and sellers. |

| |To establish and enforce trading rules and standards. |

| |To settle disputes. |

| |To collect and disseminate marketing information to the public. |

| |A futures contract is a legally binding commitment to make or take delivery of a standardized quantity and |

| |quality of a commodity at a predetermined place and time in the future, for a price determined by auction in the |

| |trading pit of an exchange. |

| | |

| |Price is determined by Open Outcry. |

| |Open Outcry is the price determination by shouting bids for commodities in a trading pit. |

| |The two ways a futures contract can be settled are delivery and offset. |

| |The five standardized terms of a futures contract are: |

| |Delivery Month – month of contracts. For example: March, May, July, September, December. |

| |Contract Size – Unit size of the contracts. For Example: Grains are 5000bu; Feeder cattle are 50000lbs and live|

| |cattle (fat Cattle) are 40000lbs. |

| |Place of Delivery – if delivered on the par delivery point. |

| |Minimum Price fluctuations – minimum movement in the price – for example: ¼ cent in grains. |

| |Maximum Daily Price Move – Maximum it can move in one day – for example 30 cents in wheat. |

| | |

| |The participants in the Futures Market are Traders, Brokers, Floor Brokers, Professional Speculators, Scalpers, |

| |Pit traders, Floor Traders, Hedgers, and Public Speculators. |

| |A clearinghouse is an entity that insures that the number of buyers = the number of sellers. |

| |The purpose of the clearinghouse is to assume the opposite side of every trade so that all connections between |

| |buyers and sellers are served. |

| |A margin is the amount of money that a trader deposit in an account. |

| |A Maintenance Margin is minimum amount of money that must be kept in accounts. |

| |A Short Position means that you are trying to protect the commodity in your possession from falling prices by |

| |selling first. |

| |Producers are most likely to take a short position. |

| |A Long Position means that you are trying to protect the purchase price of a commodity that you plan on obtaining|

| |from rising prices. |

| |Mills, factories, and packers are most likely to take a long position. |

| |A Normal Market is when nearby prices are lower than the distant contract price – so prices increase into the |

| |future. For example, if the nearby month is Dec and the Dec price is 2.32 and the March price 2.39 and the May |

| |price is 2.44 and the July Price is 2.48 and the Sept price is 2.57 then the market is normal. |

| |An Inverted Market is when nearby prices are higher than distant contract prices – So prices decrease into the |

| |future. For example, if Dec is the nearby month again, but this time the Dec price is 2.32, the March price is |

| |2.28, the May price is 2.20, the July price is 2.16, and the Sept price is 2.10, now the market is inverted. |

| |The simple rule is to buy low an sell high in either order. |

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