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| Question | Answer |
| What are the big NC Ag. commodities that Piggott pointed out? | Hogs Cattle and calves Soybeans Cotton Corn Wheat |
| What is hedging? | Hedging entails particiating in the futures or options market to neutralize the effects of asset (commodity or financial) price risk |
| Why do we hedge? | It allows effective risk management transfer of risk to another party |
| What do most speculators do? | Lose money unless they trade based on a set of well-defined and refined set of rules. e.g. don't hold a position overnight |
| Why are speculators important? | They provide liquidity to the market because of the frequency of their trades |
| agriculture is a ______ business with ________ markets | risky / volatile |
| What does WASDE do and stand for? | WASDE = World Agricultural Supply and Demand Estimates Released once a month on the 10th, produce estimates of supply and demand for crops and can influence futures trading |
| Examples of very close / fast acting links are: | -Weather events in prominent ag countries -Increases in world oil prices -US Farm Bill developments -EPA Regulations -Changes in the Renewable Fuel Standard (RFS) divert corn from feed to ethanol |
| Examples of slower but real links are: | -Gradually changing diets in developing world, people wanting to eat more animal protein as incomes increase, increases world demand for feed grains, resulting in higher feed prices for NC broiler / hog producers (but helps NC feed grain producers) Could also be beneficial to NC broiler/hog producers with increased exports - Research on new plant varieties/biotech eventually lowers the costs of production for NC row crop producers and NC users of feed grains |
| the US agricultural economy is a _________ in US economics | bright spot (income has increased during this time of volatile markets) |
| Primary function of the futures / options markets is | price discovery It's today's best guess of what prices will be in the future |
| Participants can register in the FO mkt by | taking a position in the market but it only matters if money backs it |
| futures markets establish prices for ___________. All forward pricing relies on ________. | deferred delivery / futures prices |
| ___________ are traded on underlying ________ contracts | Options / Futures |
| Why do futures markets work? | - a large # of participants (impossible to manipulate the mkt) - Standardized: Quantity, Quality, Delivery Time, and Place - Easy entry and exit at a low cost - Reduces the cost of doing business - Highly regulated to ensure they remain competitve |
| What is a futures contract? | *legally binding agreement to buy and sell a commodity in the future *only variable is price which is determined on the futures exchange floor *this price once agreed upon does not change and is the price paid and received at the delivery date |
| sellers are called _____ and _____________ | SHORT Sellers agree to deliver the specified quantity at the agreed upon price at the designated date in the future |
| buyers are called _____ and _______ | LONG Buyers agree to purchase the specified quantity at the agreed upon price at the designated date in the future |
| What is an option? | An option is the right but not the obligation to purchase or sell a commodity at a certain price for a limited period of time |
| Put Option | Right to sell |
| Call option | right to buy |
| Hedging is what kind of trade-off? | Give up the chance for additional profits due to favorable price changes in return for reduction in risk exposure due to adverse changes in prices |
| Hedging requires _____ | Hedging requires taking an opposite position in the futures market today than you have in the cash market |
| Basic principle of hedging? | Gains and losses in the cash position must be offset by gains and losses in the futures position |
| cash prices | Sometimes referred to as “spot price”. The actual price market price for the physical commodity in a given location (e.g. corn in Elizabeth City, NC). |
| Forward Contract | Contract calling for the future delivery of physical commodity at a specified price and a set time period. |
| Futures Contract | An obligation to buy or sell a specific quantity and quality of a commodity or financial instrument at a certain price in a specified future data. Primary use is for offsetting price risks in the cash market or to take advantage of price movements rather than to buy the physical underlying commodity. |
| Long | A long position in the futures market involves buying the underlying asset. “L” for light like a feather and float up and away |
| Short | A short position in the futures market involves selling the underlying asset. “S” for heavy like a stone and drop to the floor |
| Broker | A person or form that handles futures and options trades on the floor of an exchange for a nominal fee or commission. |
| Exchanges | Organized futures and options markets where futures and options contracts are traded (e.g, CME, CBT). |
| Hedging | Participating in the futures or options market to neutralize the effects of a commodity or financial risk. Requires taking an opposite position in the futures market today than you have in the cash market. |
| Speculating | Speculators participate in the futures market with the sole intention of making a profit. They play a critical role in providing liquidity to the market. Most people who speculate lose. To make a profit takes much skill and discipline. |
| Cash Delivery | Applies mostly to commodities. The seller delivers the actual product to the buyer. |
| Cash Settlement | Cash settlement applies mostly to financial contracts. There is no delivery of the financial instrument things are settled in cash. |
| Delivery Month | The month during which the futures contract expires |
| Nearby | The futures contract month that is closest to expiration |
| New Crop | The futures crop month that is closest to when the underlying crop is next harvested (for example November for soybeans and December for corn). |
| Ticker Symbols of the Months |
Image:
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| Volume tends to be concentrated in ______ months and also ________ ______ months if there is one | Front / new crop |
| Opening or Open Interest is | another way to gauge liquidity of the markets and is the amount of outstanding contracts, measured with a days delay |
| Cents per Bushel | 432'0 = 4.3200 455'2 = 4.5525 546'4 = 5.4650 673'6 = 6.7375 |
| Zero Sum Game | A trade in which one participant's gains result only from another participant's equivalent losses. The net change in total wealth among participants is zero; the wealth is just shifted from one to another. Future contracts are examples of zero-sum games (excluding costs). For every person who gains on a contract, there is a counter-party who loses. Gambling like playing black-jack is also an example of a zero-sum game. The stock market, however, is not a zero-sum game because wealth can be created in a stock market. That is, when the stock goes up everyone who owns it gains. It is possible to lose on a stock going up if one shorts it but this is not commonly done. Most owners of stock have a buy and hold strategy like your 401k account. |
| Margin Deposit | A deposit made with your broker into your account that allows you to buy or sell futures. If futures move adversely against you (you have a loss), then the losses must be replenished back to the levels to meet the margin requirements. |
| Margin Call | A trader will receive a margin call when the market has moved unfavorably against the trader. The broker will contact the investor who must replenish their account to the original margin deposit. If the trader fails to make the margin call in time their position is liquidated to limit further losses and they are still responsible for paying for the loss incurred. This is what scares producers and keeps them up at night if they are close to a margin call. |
| Mark to Market | Used in futures trading involving the process of valuing the assets covered in a futures contract at the end of the each trading day and then the profit and loss is settled between the long and the short. This ensures liquidity and the integrity of the market and the trade. |
| Daily Settlement | This the process that the clearinghouse (exchange) conducts daily where they take the settlement price (or closing price) and then converts the paper gains and losses to actual gains and losses in the accounts of the shorts and longs. If necessary margin calls will by made if a particular accounts balance falls below the minimum margin level. |
| Initial Margin | Is the amount you must have in your account to purchase a commodity futures contract. It varies based on the commodity you are trading. |
| Maintenance Margin | Is the amount that you must have in your account to maintain an open position. It is usually less than the initial margin. You account value must be above this level at the daily settlement to avoid a margin call. |
| Quick Check for Mark to Market | Gain / Loss = Change in Price * Quantity |
| Price Risk | The possibility that the price of a physical commodity may decline (producer) or rise (user). |
| Biggest driver of price risk is | weather |
| biggest driver for non-ag commodities are | natural disasters, elections, geopolitical, logisitics all can be drivers of price volatility |
| Basis is | basis is the difference between local cash prices and futures market prices at any point in time |
| basis = local cash price - futures prices so... | local cash price = futures price + basis |
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