Resume Wizard - Colorado FFA
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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