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© 2015 CME Group. All rights reserved.
Using derivatives in spot grain market
28-29 May, 2015
Odessa
© 2015 CME Group. All rights reserved.
Futures Industry: A Historical Perspective
© 2015 CME Group. All rights reserved.
Chicago
Mercantile
Exchange
(CME)
Chicago
Board of
Trade
(CBOT)
New York
Mercantile
Exchange
(NYMEX)
Commodity
Exchange
(COMEX)
© 2015 CME Group. All rights reserved.
Futures Industry Roots – AGRICULTURE
Chicago Board of Trade
1848
CBOT world’s first modern
era futures market; with a
constitution & principles.
First products: Corn & Wheat
© 2015 CME Group. All rights reserved.
Price Discovery: Wheat
© 2015 CME Group. All rights reserved.
Uncertainty!
What is the Agricultural Customer's Market Risk?
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What is the Most Important Part of Your Business
Buying & Selling
Physical Agricultural Products
Risk Management!
© 2015 CME Group. All rights reserved.
Volatility (Annualized %)
How Do You Measure Market Risk?
© 2015 CME Group. All rights reserved.
Historic Volatility: Corn & Wheat February 2000 – February 2015
© 2015 CME Group. All rights reserved.
Legally binding agreement to accept
delivery of or make delivery of a
standardized ______ and ______
of a commodity to a standardized _____
during a standardized ____ period for a _____
discovered in an organized futures exchange.
Futures Contract: Defined
quantity quality
place
time price
© 2015 CME Group. All rights reserved.
Economic Functions of Futures
Price
Discovery
Risk
Management
Futures
Markets
© 2015 CME Group. All rights reserved.
Price Discovery: Supply & Demand
• Prices are Discovered
• Prices are NOT set by the Exchange
• Closest form of “perfect competition”
• Two-way Price Impact
• Transparent Prices
© 2015 CME Group. All rights reserved.
Basis
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Basis: The Key Factor to Successful Hedging
Cash Price
Futures Price
Basis
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Basis: Components
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Sample of Basis: Nearby Corn versus Gulf Cash
© 2015 CME Group. All rights reserved.
Basis Contracts: - the price is fixed at the seeding for the producer - producer and trader fix the selling and the buying prices at their discretion
© 2015 CME Group. All rights reserved.
Basis Contract – main features
• Establishes (locks-in) a basis level in advance of actual cash
transaction
• Only the basis level is locked-in
• Price level is derived from a futures price at a time the customer
chooses
• But must occur before the specific futures contract expires
• Subject to risk of changing price levels
Equation
Specified futures contract price at time of “pricing” + “locked-in” basis
© 2015 CME Group. All rights reserved.
CME Group wheat futures September 2015
160
180
200
220
240
260
280
September 15 wheat futures, $/t
© 2015 CME Group. All rights reserved.
Fixing price at the seeding - Basis contract
CME Group September 2015 - Basis
CASH FUTURES BASIS 29 Oct. 14
Sign a Basis contract Sep.15
@ $211/t – basis, or $201/t
to receive at the harvest
10
20
Producer
CASH FUTURES BASIS 29 Oct. 14
Sell Sept. 15
@ $211/t 10
Trader
Doing nothing
Sign a Basis contract Sep.15
@ $211/t – basis, or $201/t
to pay at the harvest
© 2015 CME Group. All rights reserved.
Fixing price at the seeding - Basis contract
CME Group September 2015 - Basis
CASH FUTURES BASIS 29 Jul. 15
Receive $201/t
Spot price $190/t 10
21
Producer
CASH FUTURES BASIS 29 Jul. 15
Buy Sept. 15
@ $200/t
Gain 11$/t
10
Trader
Doing nothing
Falling prices – Sept. 15@ $200/t
Pay $201/t
Spot price $190/t
Total buying price: 201-11= $190/t
Total selling price: = $201/t
© 2015 CME Group. All rights reserved.
Fixing price at the seeding - Basis contract
CME Group September 2015 - Basis
Net amount received = $201/t Net amount paid = 201 - 11 = $190/t
Cash market Futures market Futures market Cash market
Sell Sept. 15 @
$211/t
29/10/14 Sign basis
contract @
Sept. 15-10 to
receive $201/t
at the harvest
Producer Trader
Sept.15
211 $/T
N/A Gain $11/t
BALANCE
Doing
nothing
29/07/15
Gain/
Loss
Receive $201/t
Spot price
$190/t
Doing
nothing
Pay $201/t
Spot price
$190/t
Sign basis
contract @
Sept. 15-10 to
pay $201/t at
the harvest
200 $/T
Buy Sept. 15 @
$200/t
© 2015 CME Group. All rights reserved.
Basis contract (CME Group Sept.15 - basis) where
seller and buyer fix the prices at their discretion
CASH FUTURES BASIS 25 Sept. 14
Sign a Basis contract
to sell at the harvest
@ Sep.15 – basis
10
23
Producer
CASH FUTURES BASIS
10
Trader
Doing nothing
Sign a Basis contract
to buy at the harvest
@ Sep.15 – basis Doing nothing
25 Sept. 14
© 2015 CME Group. All rights reserved.
Net amount received = $218/t Net amount paid = 218 - 40 = $178/t
Cash market Futures market Futures market Cash market
Sell Sept. 15 @
$228/t
02/12/14
Producer Trader
Sept.15
228 $/T
N/A Gain $40/t
BALANCE
Doing
nothing
02/02/15 Doing
nothing
Decide to fixe the
Buying Price @
188-10=$178/t 188 $/T
Buy Sept. 15 @
$188/t
20/07/15
Gain/
Loss
Receive
$218/t
Doing
nothing Doing
nothing Pay $218/t
Accept to pay to
the producer
228-10=$218/t
25/09/14 Sign basis contr.
Sept.15 - 10
Doing
nothing
Doing
nothing Sign basis contr.
Sept. 15 - 10
Decide to fixe the
Selling Price @
228-10=$218/t
Doing
nothing
Basis contract (CME Group Sept.15 - basis) where
seller and buyer fix the prices at their discretion
© 2015 CME Group. All rights reserved.
Net amount received = $218/t Net amount paid = 218 - 35 = $183/t
Cash market Futures market Futures market Cash market
Buy Sept. 15 @
$193/t
03/10/14
Decide to fixe the
Selling Price @
228-10=$218/t
Producer Trader
Sept.15
193 $/T
N/A Gain $35/t
BALANCE
Doing
nothing
02/12/14 Doing
nothing
Decide to fixe the
Buying Price @
193-10=$183/t
228 $/T
Sell Sept. 15 @
$228/t
20/07/15
Gain/
Loss
Receive
$218/t
Doing
nothing Doing
nothing Pay $218/t
Doing
nothing
Accept to pay to
the producer
228-10=$218/t
25/09/14 Sign basis contr.
Sept.15 - 10
Doing
nothing
Doing
nothing Sign basis contr.
Sept.15 - 10
Basis contract (CME Group Sept.15 - basis) where
seller and buyer fix the prices at their discretion
© 2015 CME Group. All rights reserved.
Basis contract (CME Group Sept.15 - basis) where
seller and buyer fix the prices at their discretion
26
the buyer secures an opportunity to buy
the seller secures an opportunity to sell
each deals with its own price and feelings
deals are not restrained because of prices
fluctuations anymore
Summery
© 2015 CME Group. All rights reserved.
Contracts with a minimum guaranteed price paid at the harvest
© 2015 CME Group. All rights reserved.
Fixing minimum price at the harvest with
potential upside on CME Group December14
28
Context:
• CME Group December 14 @ $184/t on 12 September 2014
• Basis in the market $10/t
•
• Call option with strike $184/t @ $7/t
• Producer and Trader enter into a selling agreement
• Trader will pay Producer $167/t on 12 September
• Producer will benefit from rising prices in CME Group
December 14 futures between 12/09/14 and 28/11/14 – he
decides when to fix a complement
© 2015 CME Group. All rights reserved.
Fixing minimum price at the harvest with
potential upside for the Producer
CASH FUTURES BASIS 12 Sept. 14
Sign a contract with minimum
price $184/t – basis or $167/t to
receive on 12/09/14
10+7=17
29
Producer
Trader
Doing nothing
CASH FUTURES BASIS 12 Sept. 14
10+7=17
Buy Call Dec.14
Strike $184/t @
$7/t
Sign a contract with minimum
price $184/t – basis or $167/t to
pay on 12/09/14
December 14 @ $184/t
© 2015 CME Group. All rights reserved.
Fixing minimum price at the harvest with potential
upside for producer (CME Group December14)
Net amount received:167+22 = $189/t Net amount paid: 167+7= $174/t
Cash market Futures market Futures market Cash market
Buy Dec.14 Call
strike $184/t @
$7/t
12/09/14 Sign minimum
guaranteed
price contract @
184-17 to
receive $167/t
at the harvest
Producer Trader
Dec.14
$184/T
Gain $206-184
=$22/t
BALANCE
Doing
nothing
26/11/14 Receive a
complement
$206-184=22/t
Spot price
$196/t
Doing
nothing
Pay a
complement
$212-184=28/t
Spot price
$196/t
206 $/T
Sign minimum
guaranteed
price contract @
184-7 to pay
$167/t at the
harvest
Rising prices
Exercise Call
© 2015 CME Group. All rights reserved.
Fixing minimum price at the harvest with potential
upside for producer (CME Group December14)
Net amount received: $167/t Net amount paid: 167+7= $174/t
Cash market Futures market Futures market Cash market
Buy Dec.14 Call
strike $184/t @
$7/t
12/09/14 Sign minimum
guaranteed
price contract @
184-17 to
receive $167/t
at the harvest
Producer Trader
Dec.14
$184/T
BALANCE
Doing
nothing
28/11/14 Receive no
complement
Spot price
$160/t
Doing
nothing
Pay no
complement
Spot price
$160/t
170 $/T
Sign minimum
guaranteed
price contract @
184-7 to pay
$167/t at the
harvest
Falling prices
Call is not
exercised
© 2015 CME Group. All rights reserved.
Fixing minimum price at the harvest with potential
upside for the Producer
32
the buyer secures an opportunity to buy
the seller gets cash at the harvest
storage capacities are availible for the buyer
upside potential is not compromised for the buyer
Summery
© 2015 CME Group. All rights reserved.
Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of
a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders
should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one
trade because they cannot expect to profit on every trade. All references to options refer to options on futures.
Swaps trading is not suitable for all investors, involves the risk of loss and should only be undertaken by investors who are ECPs within the
meaning of section 1(a)12 of the Commodity Exchange Act. Swaps are a leveraged investment, and because only a percentage of a contract’s
value is required to trade, it is possible to lose more than the amount of money deposited for a swaps position. Therefore, traders should only use
funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because
they cannot expect to profit on every trade.
Any research views expressed are those of the individual author and do not necessarily represent the views of the CME Group or its affiliates.
CME Group is a trademark of CME Group Inc. The Globe Logo, CME, Globex and Chicago Mercantile Exchange are trademarks of Chicago
Mercantile Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago, Inc. NYMEX, New
York Mercantile Exchange and ClearPort are registered trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity
Exchange, Inc. All other trademarks are the property of their respective owners.
The information within this presentation has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for
any errors or omissions. Additionally, all examples in this presentation are hypothetical situations, used for explanation purposes only, and should
not be considered investment advice or the results of actual market experience.
All matters pertaining to rules and specifications herein are made subject to and are superseded by official Exchange rules. Current rules should be
consulted in all cases concerning contract specifications.
Copyright © 2015 CME Group. All rights reserved.
Disclaimer
© 2015 CME Group. All rights reserved.
Thank you!
Good luck trading!
Alexandre Bobylov
+44 2033 793 734 (office)
+44 7702 813 651 (mobile)