Commodity Challenge Help - Simpson County...The Set Price alternative allows you to establish the price you want for a cash grain sale. For example, the current cash soybean quote

Commodity Challenge Help

© 2013 Center for Farm Financial Management

Commodity Challenge Help by the Center for Farm Financial Management


All rights reserved. No parts of this work may be reproduced in any form or by any means - graphic, electronic, or mechanical, including photocopying, recording, taping, or information storage and retrieval systems - without the written permission of the publisher.

Products that are referred to in this document may be either trademarks and/or registered trademarks of the respective owners. The publisher and the author make no claim to these trademarks.

While every precaution has been taken in the preparation of this document, the publisher and the author assume no responsibility for errors or omissions, or for damages resulting from the use of information contained in this document or from the use of programs and source code that may accompany it. In no event shall the publisher and the author be liable for any loss of profit or any other commercial damage caused or alleged to have been caused directly or indirectly by this document.

Printed: March 2013 in St. Paul, MN.

5Contents

5


Table of ContentsForeword 7

Part I Playing Commodity Challenge 10

................................................................................................................................... 101 Join a Game

................................................................................................................................... 102 Starting a Game

.......................................................................................................................................................... 10Quick Start game

.......................................................................................................................................................... 11Custom game

................................................................................................................................... 113 My Games

.......................................................................................................................................................... 11Active Games

.......................................................................................................................................................... 12Past Games

.......................................................................................................................................................... 12Games I Manage

................................................................................................................................... 124 LEADERBOARD

.......................................................................................................................................................... 12LEADERBOARD Detail

................................................................................................................................... 125 I want to make a transaction

.......................................................................................................................................................... 12Cash

......................................................................................................................................................... 12Commodity

......................................................................................................................................................... 12Quantity

......................................................................................................................................................... 12Price

......................................................................................................................................................... 13At the Market

......................................................................................................................................................... 13Set Price

.......................................................................................................................................................... 13Forward

......................................................................................................................................................... 13Commodity

......................................................................................................................................................... 13Delivery Date

......................................................................................................................................................... 13Quantity

......................................................................................................................................................... 13Price

......................................................................................................................................................... 13At the Market

......................................................................................................................................................... 14Set Price

.......................................................................................................................................................... 14Futures

......................................................................................................................................................... 14Commodity

......................................................................................................................................................... 14Action to Take

......................................................................................................................................................... 14Select Contract

......................................................................................................................................................... 14Number of Contracts

......................................................................................................................................................... 14Price

......................................................................................................................................................... 14At the Market

......................................................................................................................................................... 15Set Price

.......................................................................................................................................................... 15Options

......................................................................................................................................................... 15Commodity

......................................................................................................................................................... 15Call/Put

......................................................................................................................................................... 15Action to Take

......................................................................................................................................................... 15Select Contract

......................................................................................................................................................... 15Strike Price

......................................................................................................................................................... 15Number of Contracts

......................................................................................................................................................... 15Premium

......................................................................................................................................................... 16At the Market

......................................................................................................................................................... 16Set Premium

................................................................................................................................... 166 Reports (How am I doing?)

.......................................................................................................................................................... 16Summary

Commodity Challenge Help6


.......................................................................................................................................................... 16Positions

......................................................................................................................................................... 17About Position Limits

......................................................................................................................................................... 19Futures vs. Options Positions

.......................................................................................................................................................... 20Open Orders

.......................................................................................................................................................... 20Transactions

.......................................................................................................................................................... 20Brokerage

Part II Toolbox 22

................................................................................................................................... 221 Admin

.......................................................................................................................................................... 22Manage Games

.......................................................................................................................................................... 22Manage Users

................................................................................................................................... 222 Settings

.......................................................................................................................................................... 22Profile Settings

................................................................................................................................... 223 Add/Edit Game

.......................................................................................................................................................... 22Game Title

.......................................................................................................................................................... 22Game Description

.......................................................................................................................................................... 22Game Leader

.......................................................................................................................................................... 22Game Password

.......................................................................................................................................................... 23Game Start Date/Time

.......................................................................................................................................................... 23Game Registration Close Date/Time

.......................................................................................................................................................... 23Game End Date/Time

.......................................................................................................................................................... 23Enabled Transactions

.......................................................................................................................................................... 23Commission Rate

.......................................................................................................................................................... 23Your Commodities

................................................................................................................................... 234 Games

Index 0

Playing Commodity Challenge



1 Playing Commodity Challenge

Commodity Challenge is an on-line trading game, featuring real-time quotes from several grain futuresmarkets and numerous local cash markets located throughout the country. It differs from other tradingsimulations by emphasizing the use of futures and options for risk management purposes (hedging),and not for speculation.

Every player in Commodity Challenge is asked to play the role of a grain producer. Each playerproduces the same number of bushels - for example, 25,000 bushels of wheat. The price of wheatcan vary greatly - as high as $20 and as low as $4 per bushel since 2005 – and you have to makesome difficult choices. You may choose to sell your wheat into the local market at the current price, oryou may choose to store the grain for sale later in the year. Alternatively, you may choose to sellfutures contracts to establish a price, or use option contracts to establish a minimum price. You havemany choices, and Commodity Challenge gives you the chance to explore your alternatives, learnabout the markets and have some fun.

Commodity Challenge is also an opportunity to compete with your peers as you manage the risk andopportunity in marketing your crop. What price will you get for your production?

1.1 Join a Game

From your Home page, click on "FIND A GAME" in the upper right-hand corner. The Join a Gamesection displays a list of games. Most Commodity Challenge games are private - you must know apassword to play these games. If you are new to Commodity Challenge and would like to explore thefeatures, look for an open game to join (i.e., a game that is not password protected). There will alwaysbe a small selection of open games available to join.

1.2 Starting a Game

Starting a Commodity Challenge game for your group is easy and free. You can request a QuickStart game, or a Custom game.

1.2.1 Quick Start game

With a Quick Start game, many games specs are defined for you. For example, grains traded,quantities and harvest dates will be selected based on your location. Registration for the game will beopen for several weeks after the start date. Brokerage fees and storage costs are set at $50/contractand 5 cents/bu. per month, respectively. Finally, all Quick Start games are password protected. Finalgame specifications will be shared by email with the Game Leader.

Very little information is needed to get you started!

1. Group name/game title: (e.g., Farm Marketing Group, Central High School FFA, etc.)2. Location: (e.g., Cresco IA, Mankato MN, etc.)3. Game Leader: name, email and phone number4. Start date:5. End date: All positions are marked-to-market and winners declared based on the closing market

prices on this day.

Send this information via email to Edward Usset at [email protected]. Questions? Please call 651-625-7014.

Playing Commodity Challenge 11


1.2.2 Custom game

To customize a game for your group, define the following specifications.

1. Group name/game title: (e.g., West Tech Ag Marketing 101, Ohio Women in Ag, etc.)2. Location: (e.g., Norfolk, NE, Eureka IL, etc.)3. Game Leader: name, email and phone number4. Game description: This is your chance to describe your players and what commodities will be

traded. Are there prizes? Example: This game is designed for producers near Valley City, ND.Players trade HRS wheat and soybeans on the cash, futures, and options markets. Cash salescannot be made until harvest (August 20 for wheat, September 25 for soybeans). Until harvest, youcan use forward contracts, futures or options to price grain. Good luck!

5. Game password: We recommend password protection.6. Start date:7. Registration close date: How much time will you give players to join your game? A week or two

should be plenty of time for most people.8. Harvest date: The harvest date simulates the date your commodities will be harvested and

available to be sold on the cash market. Pricing prior to this date will be limited to forward contracts(if available), or futures and options contracts. By setting a harvest date after the end date for thegame, you have established a new crop pricing game.

9. End date: All positions are marked-to-market and winners declared based on the closing marketprices on this day.

10.List up to four commodities, with quantities in bushels: At this point, Commodity Challenge islimited to grains. Corn, soybeans, SRW wheat, HRW wheat, and HRS wheat have futures andoptions markets available for price risk management. Barley, durum wheat and soft white wheat arealso available with cash market quotes.

11.Preferred cash market location for each commodity: 12.Transactions allowed: Cash sales are always allowed. You can choose whether or not to allow the

use of futures contracts or options contracts.13.Forward contracts: You can choose to establish forward contracts for delivery in two different time

periods for each commodity (e.g. October and January delivery for corn, September and Decemberdelivery for soybeans).

14.Commission costs: Choose a figure in $/contract ($50 to $60 per contract per round-turn is typical)15.Storage costs: Choose a figure in cents/bu. per month (4 to 5 cents/bu. per month are common).

Send this information via email to Edward Usset at [email protected]. Questions? Please call 651-625-7014.

1.3 My Games

This is a rundown of your active games, past games and games you manage (for administrators only).

1.3.1 Active Games

These are games you have joined and are competing in. Simply click on the PLAY button on the righthand side to resume your activities in the game. The PLAY button will take you to the gamedashboard. On the left side of the dashboard, you will find the leader board for the game, and cashand futures market quotes that are relevant to your game. Do you want to make a transaction? On theright side of the dashboard are buttons titled CASH, FORWARD, FUTURES and OPTIONS - youropportunity to take action in these markets.

Below these buttons, you can explore your status in the current game. Five important tabs give you anin-depth rundown on your current results and activities: Summary, Positions, Open Orders,Transactions and Brokerage.



1.3.2 Past Games

These are games you competed in that have now ended.

1.3.3 Games I Manage

This section is available only to Game Administrators.

1.4 LEADERBOARD

The Leader Board ranks all players from highest to lowest by total net revenues for all commoditiestraded in the game. The net revenue figures are updated each day at 3:00 pm Central time, when allunsold cash grain and open futures and options positions are marked-to-market.

Clicking on the "More" button at the bottom of the Leader Board brings you to the Leader BoardDetail.

1.4.1 LEADERBOARD Detail

The Leader Board Details shows how players are doing by commodity. Again, all figures areupdated each day at 3:00 pm Central time, when open positions and unsold grain are marked-to-market.

1.5 I want to make a transaction

So you are ready to take action. Commodity Challenge allows for four different types of pricingactions; a simple cash sale, a forward contract, a futures transaction and an options transaction.

1.5.1 Cash

Are you ready to make a sale of cash grain? From your game dashboard, select CASH, and theopportunity to make a cash sale appears.

1.5.1.1 Commodity

Select the Commodity you want to sell. These are limited to the commodities traded in the game.

1.5.1.2 Quantity

Write in the quantity (bushels for grains) and do not use commas. For example, if you want to sell10,000 bushels of corn, type in "10000", and not 10,000.

1.5.1.3 Price

In terms of your sale price, you have two choices; At the Market or Set Price.

At the Market sales are made at the latest market price to trade, specifically the latest futures trade,adjusted for the local basis in your cash market. For grains, At the Market prices are typically madewithin a quarter cent (higher or lower) of the latest cash quote for your market. However, in particularlyvolatile markets (sometimes called a fast market), it is possible to receive a price that is quite differentfrom the most recent quote.

The Set Price alternative allows you to establish the price you want for a cash grain sale. Forexample, the current cash soybean quote is $12.23/bu. Your marketing plan calls for a sale at 12.25/bu. You can use the Set Price feature to place an order to sell cash grain for $12.25/bu. For yourorder to be filled, the cash price must trade 2 cents higher. Your risk, of course, is that this may nothappen. Set Price orders remain open until they are filled or canceled.



1.5.1.4 At the Market

At the Market sales are made at the latest market price to trade, specifically the latest futures trade,adjusted for the local basis in your cash market. For grains, At the Market prices are typically madewithin a quarter cent (higher or lower) of the latest cash quote for your market. However, in particularlyvolatile markets (sometimes called a fast market), it is possible to receive a price that is quite differentfrom the most recent quote.

1.5.1.5 Set Price

Enter a positive decimal number for the Set Price.

1.5.2 Forward

Are you ready to make a forward sale of cash grain? From your game dashboard, select FORWARD,and the opportunity to make a forward contract appears. Investopedia defines a forward contract as"A cash market transaction in which delivery of the commodity is deferred until after the contract hasbeen made. Although the delivery is made in the future, the price is determined on the initial tradedate." This is not a futures contract.

1.5.2.1 Commodity

Select the Commodity you want to sell. These are limited to the commodities traded in the game.

1.5.2.2 Delivery Date

Delivery Date. Commodity Challenge allows for up to two different forward delivery dates for eachcommodity.

1.5.2.3 Quantity

Quantity should be written without commas. For example, if you want to sell 5,000 bushels of HRSwheat, type in 5000, and not 5,000.

1.5.2.4 Price

In terms of your sale price, you have two choices; At the Market or Set Price.

At the Market sales are made at the latest market price to trade, specifically the latest futures trade,adjusted for the local basis for the forward market in question. For grains, At the Market prices salesare typically made within a quarter cent (higher or lower) of the latest forward quote for your market.However, in particularly volatile markets (sometimes called a fast market), it is possible to receive aprice that is quite different from the most recent quote.

The Set Price alternative allows you to establish the price you want for a forward grain sale. Forexample, assume it is January and the current forward quote for HRW wheat is $6.94/bu. for harvestdelivery (late June). Your marketing plan calls for a sale at $7.00/bu. You can use the Set Pricefeature to place an order for a forward contract at $7.00/bu. For your order to be filled, the forwardprice must trade 6 cents higher. Your risk, of course, is that this may not happen. Set Price ordersremain open (see "open orders") until they are filled or canceled.


At the Market sales are made at the latest market price to trade, specifically the latest futures trade,adjusted for the local basis for the forward market in question. For grains, At the Market prices salesare typically made within a quarter cent (higher or lower) of the latest forward quote for your market.However, in particularly volatile markets (sometimes called a fast market), it is possible to receive aprice that is quite different from the most recent quote.



1.5.2.6 Set Price


1.5.3 Futures

Rather than sell cash grain (with a cash sale today or forward contract - a cash sale for later deliverylater) you can choose to sell a futures contract. From your game dashboard, select FUTURES, andthe opportunity to make a futures trade appears. Using futures contracts instead of making a cashsale is hedging, or the use of a futures contract as a temporary substitute for a later transaction in thecash market.

1.5.3.1 Commodity

Select the Commodity you want to trade in the futures market. These are limited to the commoditiestraded in the game.

1.5.3.2 Action to Take

If you have no existing futures position, your choices are limited to Buy or Sell. If you have an existingfutures position, you will also be offered the opportunity to Offset your existing position.

1.5.3.3 Select Contract

While there is no hard and fast rule on the contract delivery month to select, hedgers typically selectthe contract that most closely aligns with final grain delivery. For example, if you use futures to pricegrain that you expect to deliver in early June, you would hedge in the July contract.

1.5.3.4 Number of Contracts

Grain futures contracts are a standardized 5,000 bushels. If you want to price 25,000 bushels of corn,type in "5" for 5 contracts.

1.5.3.5 Price

In terms of a futures price, you have two choices; At the Market or Set Price.

At the Market sales are made at the latest futures market price to trade. For grains, At the Marketprices are typically made within a quarter cent (higher or lower) of the latest futures quote for yourmarket. However, in particularly volatile markets (sometimes called a fast market), it is possible toreceive a price that is quite different from the most recent quote.

The Set Price alternative allows you to establish the price you want for a futures price. Consider, forexample, if you wanted to sell May soybean futures to establish a price for soybeans to be deliveredin April. May'XX soybeans are currently quoted at $13.21//bu. You would like to make a sale withMay'XX soybeans at $13.35/bu. or higher. You can use the Set Price feature to place an order to sellMay futures at $13.35/bu. For your order to be filled, the futures price must trade 14 cents higher.Your risk, of course, is that this may not happen. Set Price orders remain open (see "open orders")until they are filled or canceled.


At the Market sales are made at the latest futures market price to trade. For grains, At the Marketprices are typically made within a quarter cent (higher or lower) of the latest futures quote for yourmarket. However, in particularly volatile markets (sometimes called a fast market), it is possible toreceive a price that is quite different from the most recent quote.



1.5.3.7 Set Price


1.5.4 Options

Option contracts offer you one more pricing alternative. Instead of making a cash sale today or a cashsale for later delivery later (aka a forward contract) or selling futures contracts, you could buy putoptions or sell call options. From your game dashboard, select OPTIONS, and the opportunity tomake an options trade appears. (Warning! The sale of call options is not a typical hedge, and youshould explore the risks before making this type of transaction).

1.5.4.1 Commodity

Select the Commodity you want to trade in the options market. These are limited to the commoditiestraded in the game.

1.5.4.2 Call/Put

Call options are the right to buy futures. Put options are the right to sell futures.

1.5.4.3 Action to Take

If you have no existing options position, your choices are limited to Buy or Sell. If you have anexisting options position, you will also be offered the opportunity to Offset your existing position.

1.5.4.4 Select Contract

While there is no hard and fast rule on the contract delivery month to select, hedgers typically selectthe contract that most closely aligns with final grain delivery.

1.5.4.5 Strike Price

While there is no hard and fast rule on the strike price to select, hedgers often select a strike price thatis one or two strikes out-of-the-money.

1.5.4.6 Number of Contracts

Grain futures contracts are a standardized 5,000 bushels. If you want to price 25,000 bushels of corn,type in "5" for 5 contracts.

1.5.4.7 Premium

Strike prices for options are established by the exchanges. The premium is the price paid for the rightto buy (calls) or sell (puts) options at particular strike prices.

At the Market trades are made at the premium of the latest options trade. Be forewarned! Unlikefutures markets, options markets (particularly in the HRW and HRS wheat markets) are not heavilytraded and "At the Market" premiums could take hours to fill and be several cents more or less thanthe latest options quote. Even in the more heavily traded corn and soybean markets, options that aredeep in-the-money or out-of-the-money may trade infrequently. Again, an "At the Market" order fillcould take hours (or days) to fill and be several cents more or less than the latest options quote.

The Set Premium alternative allows you to establish the premium you want for an option. Consider,for example, if you wanted to buy a March 700 HRW wheat put (the right to sell May HRW futures at$7/bu.) The May 700 put is currently quoted at a premium of 28 cents/bu. You can use the SetPremium feature to place an order to buy the put for 26 cents/bu. For your order to be filled, the optionpremium must trade 2 cents lower. Your risk, of course, is that this may not happen. Set Premiumorders remain open (see "open orders") until they are filled or canceled.




At the Market trades are made at the premium of the latest options trade. Be forewarned! Unlikefutures markets, options markets (particularly in the HRW and HRS wheat markets) are not heavilytraded and "At the Market" premiums could take hours to fill and be several cents more or less thanthe latest options quote. Even in the more heavily traded corn and soybean markets, options that aredeep in-the-money or out-of-the-money may trade infrequently. Again, an "At the Market" order fillcould take hours (or days) to fill and be several cents more or less than the latest options quote.

1.5.4.9 Set Premium

Enter a positive decimal number for the Set Premium.

1.6 Reports (How am I doing?)

In this section, you can explore your status in the current game. Five important tabs give you an in-depth rundown on your current results and activities: Summary, Positions, Open Orders, Transactionsand Brokerage.

1.6.1 Summary

This page offers a mark-to-market summary of all sources of revenue by commodity.

Production is the amount of grain you have to sell in the game. In an old crop game, this is grain instorage (and storage fees are accumulating!). For a new crop game, this is your anticipated harvest.

Value of cash sales is the bushels sold in the cash market multiplied by the price per bushel and netof storage costs (if any).

Value of unsold is the bushels remaining to be sold multiplied by the price per bushel - today’s cashprice for grain held in storage, or the new crop price for grain at harvest.

Total cash value adds the value of cash sales to the value of unsold bushels.

Futures profits is the total of gains and losses from activities in the futures markets, net of brokeragecosts.

Options profits is the total of gains and losses from activities in the options markets, net of brokeragecosts.

Net value is the total cash value adjusted for all futures and options profits (or losses).

Net unit price simply takes your net value and divides it by production.

1.6.2 Positions

The “Positions” report attempts to answer an important risk management question: What is myexposure to the market? If, for example, you start a game with 100,000 bushels of corn in storage,you have 100,000 bushels fully exposed to price fluctuations in the markets - a price decline of 25cents/bushel will cost you $25,000 in lost revenues.

For grain games, all units are in bushels.

Production is the amount of grain you have to sell in the game. In an old crop game, this is grain instorage (and storage fees are accumulating!). For a new crop game, this is your anticipated harvest.



Cash sales are the total quantity sold in the cash market.

Forward contracts are the total quantity sold with forward contracts.

Quantity unsold is your production less cash sales and forward contracts.

Futures sold are the total quantity sold in the futures market. Using futures contracts to price grain iscalled hedging, or the use of futures as a temporary substitute for an eventual sale in the cashmarket.

Futures bought are the total quantity bought in the futures market. Other than the need to offsetearlier futures sales, grain producers are typically not buyers of futures contracts. However, sellingcash grain and buying futures (a re-ownership strategy sometimes called "paper farming") can makesense when cash prices are very high relative to the futures prices (i.e., the basis is strong).Producers use this strategy to shift ownership from the cash market to the futures market.

Put options sold are the total quantity of puts sold in the options market. Grain producers aregenerally not sellers of put options.

Put options bought are the total quantity of puts bought in the options market. Buying put options toprice grain is an alternative to selling futures contracts. Buying put options allows a producer toestablish a minimum price for grain, while maintaining the opportunity to benefit from rising prices.

Call options sold are the total quantity of calls sold in the options market. Selling call options to pricegrain (aka selling covered calls) is an alternative to selling futures contracts or buying put options.Selling calls will establishes the possibility of a maximum price, with a limited hedge against lowerprices. Caution! This is not a typical hedge.

Call options bought are the total quantity of calls bought in the options market. Grain producers aretypically not buyers of call options. However, selling cash grain and buying call options (a re-ownership strategy sometimes called "paper farming") can make sense when cash prices are veryhigh relative to the futures prices (i.e., the basis is strong). Producers use this strategy to shiftownership from the cash market to the options market.

Net Ownership is the "Quantity unsold", less futures sold, put options bot and call options sold. Thisis your net exposure to market price changes.

1.6.2.1 About Position Limits

Position limits, tied to production, are a very important part of Commodity Challenge. It distinguishedthe game other trading simulations because it emphasizes the use of futures and options for riskmanagement purposes. Other trading simulations have no ties to the underlying cash market andfocus on speculation with futures and options trading – trying to buy low and sell high for profit.

Grain producers also want to make a profit. Every time a crop is planted, they are, in effect, buyers(aka owners) of grain. The price “paid” depends on their production costs. For grain producers,futures and options are pricing tools used to or lock in a profit on their production. However, buyingand selling of futures and options in quantities unrelated to production is speculation. CommodityChallenges seeks to limit trading to risk management (aka hedging), and not speculation.

Commodity Challenge limits buying and selling transactions to no more than two timesproduction. Buying transactions include grain ownership, the purchase of futures contracts, thepurchase of call options and the sale of put options. Selling transactions include cash and forwardsales, the sale of futures contracts, the sale of call options and the purchase of put options. Sales inthe cash market (including forward contracts) are limited to production, while physical grain purchasesare not allowed. Buying and selling includes completed and pending transactions (open, or unfilled,



orders).

As a risk management exercise, Commodity Challenge is not “pure” because it allows transactions upto twice your production level. In a pure risk management exercise, you would never own or sell morethan your production. Consider, for example, a game where you produced 100,000 bushels of corn. Ifthe game was a pure risk management exercise, Commodity Challenge would not allow you to placean order to sell more than 100,000 bushels of corn bushels. Selling more than your production wouldbe shorting the market and a speculative bet on lower prices. On the other side of a pure riskmanagement exercise, you would never be able to place an order to buy more than 100,000 bushels.This sort of "Texas hedge" is a speculative bet on higher prices.

Within limits, Commodity Challenge allows some of these transactions - risk management in its purestform is a nice idea but fails to recognize the complicated nature of placing and unwinding hedges.Wiggle room is needed, and Commodity Challenge allows for it by opening game limits on tradingactivities (buying or selling) to twice the level of production. In this example, where you have 100,000bushels of corn in storage, Commodity Challenge would allow you to buy or sell 200,000 bushels(100,000 * 2). Cash sales of corn would, of course, still be limited to production. But transactions withfutures or options contracts can go beyond production.

Let’s look at two simple but realistic examples that illustrate the need for position limits beyond thelevel of production. The first example involves a simple short hedge, or the sale of futures contracts toprice grain held in storage. The second example is paper farming, a strategy of selling cash grain andre-owning the sale with the purchase of call options.

Example #1: Unwinding a short hedgeLast month, you sold 100,000 bu. in the futures market to price grain held in storage (aka a shorthedge). Now you want to unwind the hedge – sell cash grain and buy back the futures position. Theorder to sell 100,000 bu. cash grain is placed “at the market” and filled immediately. Your order to buyback futures is placed with a set price and NOT filled. Until the order to buy futures contracts is filled,your net position is 100,000 bushels short (100,000 bushels of cash grain sold, and another 100,000bushels sold in the futures market).

Example #2: Paper farming with call optionsYou hold 100,000 bushels in storage. Cash prices are strong and the futures market is inverted. Itmakes sense to shift your ownership from the cash market to the futures market, so you decide to sellgrain held in storage and re-own it with calls options. Your order to buy call options is filledimmediately, but your order to sell cash grain at a set price is pending. Until the order to sell cashgrain is filled, your net position is 200,000 bushels long (100,000 bushels of cash grain held instorage, and another 100,000 bushels of call options purchased).

In each case, the hedger has stepped into a gray area between pure hedging and speculation. Agood risk manager will address the problem quickly. In the first example, there may be a need tochange the order to buy futures from a limited order to a market order. The same is true of the secondexample – the order to sell grain is not happening. Should the selling price be lowered to complete thetransaction?

While positions up to two times production are allowed, there will be daily notices sent to players andgame leaders whenever a buy or sell position is greater than production. For a player who is“oversold,” the notice will read…

“The total of your actual and pending orders to sell grain exceeds production by XXXX bushels. Youneed to offset an existing sell position (e.g., futures sales, put option purchases or call option sales) orcancel pending orders to sell.”

For a player who is “overbought” - owns more than the amount produced - the notice will read… “The total of your actual and pending orders for grain ownership exceeds production by XXXX



bushels. You need to offset an existing purchase position (e.g., futures purchases, put option sales orcall option purchases) or cancel pending orders to buy.”

The game will not accept buy or sell orders of any kind or quantity once they are at the limit of twotimes production.

The game leader is free to establish additional rules for a game. For example, the game leader candecide that players can maintain an oversold or overbought position for no more than a day.

Position limits are there to limit pricing choices to activities that manage risk. By setting limits at twotimes production, Commodity Challenge recognizes time lags in getting orders filled and thecomplicated nature of placing and unwinding hedges.

1.6.2.2 Futures vs. Options Positions

Commodity Challenge limits buying and selling transactions to no more than two times production. Inthe position report, the following buying transactions will be viewed as ownership positions (aka longpositions)…

1. grain ownership2. the purchase of futures contracts3. the purchase of call options4. the sale of put options

While in the role of a grain producer, most players will find that their purchases in CommodityChallenge are generally limited to offsetting transactions, i.e., buying back futures contracts or putoptions sold earlier, or selling back call options purchased earlier in the game. The following transactions will be viewed as selling positions (aka short positions)…

1. grain sales (cash and forward)2. the sale of futures contracts3. the purchase of put options4. the sale of call options

While each of these actions are viewed as equals in terms of their affect on position, as pricing toolsthey are far from equal.

Grain sales speak for themselves. Make a sale to your local market and you know the exact pricereceived for your product. Make a sale in the forward market and you also know the exact price – butdon’t forget to consider the cost of storing grain until the grain is delivered.

Selling futures is the most common form of hedging for commercial grain merchandisers, where priceforecasting is avoided and hedging is standard operating procedure. By selling futures against cashgrain ownership, the risk of lower prices is eliminated and replaced by basis risk, or the differencebetween cash and futures prices. Selling futures also eliminates the opportunity to get a higher price.

Buying put options is buying the right to sell futures contracts. The cost is higher than futures, butusing them allows a producer to enjoy the benefits of rising prices, if it happens. Buying puts would bepreferred by someone with a strong opinion that prices will rise sharply in the future.

Selling call options is yet another alternative to selling cash or futures. Sellers of call receivepremiums but accept other risks. Players need to understand that, by definition, this is not truehedging. Selling calls might be considered by someone with a strong opinion that prices will stayrelatively flat in the months ahead..

To complicate the position report, buying puts and selling calls can be combined to create minimum



and maximum pricing opportunities. Because of the way these tools play off each other, the positionreport only recognizes the greater of the two positions in net positions.

1.6.3 Open Orders

Open orders are cash, futures and options orders that have been placed but remain unfilled. It is goodpractice to revisit your open orders on a regular basis and cancel the orders that are no longerrelevant to your pricing activities.

1.6.4 Transactions

Here is a detailed summary of your cash, forward, futures and options transactions in the game to-date.

1.6.5 Brokerage

The brokerage report is under construction.

Toolbox



2 Toolbox

Enter topic text here.

2.1 Admin

This section is open only to Game Administrators.

2.1.1 Manage Games

Game administrators can edit existing games. Add a commodity, enable futures and/or options,change an end date, etc. Administrators can also view a list of players participating in the game.

2.1.2 Manage Users

Game administrators can manage users. They can, for example, lock out a user from a specific game.

2.2 Settings

Change your username and password here, and let the world know as much (or as little) as you wantthem to know about you.

2.2.1 Profile Settings

Here's your chance to tell the world as much (or as little) as you want about yourself.

2.3 Add/Edit Game

The ability to create and add new Commodity Challenge games is limited to Game Administrators. If

you are not a Game Administrator, but would like to see a new game created, please contact Edward

Usset at [email protected] or 651‐308‐8224. Game Administrators can set up a new game withthemselves as the Game Leader. Game Leaders cannot create games, but can modify certain gamesettings and access Game Player records.

2.3.1 Game Title

The game title should be unique among currently active games in Commodity Challenge.

2.3.2 Game Description

The Game Description should include identifying information about this game, such as commodity

names and markets.

2.3.3 Game Leader

Select the Game Leader from this list.

2.3.4 Game Password

If this is an open game (aka open for anyone to play), leave the Game Password blank. Otherwise,

enter a password to be given to a group of users to allow them to join the game.

Toolbox 23


2.3.5 Game Start Date/Time

On this date, users will be able to join the game and begin playing.

2.3.6 Game Registration Close Date/Time

Users will be able to join this game up until this date.

2.3.7 Game End Date/Time

The game will officially end on this date. All open positions will be closed and "marked‐to‐market" as

of 3 pm Central time on this day.

2.3.8 Enabled Transactions

Cash Sales are enabled by default. Enable Futures and Option contracts here. These can be enabled

once the game begins, but cannot be disabled.

2.3.9 Commission Rate

Commissions on futures trades are a one-time charge, made when a position is exited. Commissionon options trades are charged half-in and half-out.

2.3.10 Your Commodities

Add a commodity and market using the tool provided. You may add up to four commodities per

game. In addition, you may add the same commodity more than once with different harvest dates.

For example, if you want to enable a post harvest game for corn harvested on 10/1/2012 and a pre

harvest game for corn to be harvested on 10/1/2013, you will enter each separately.

2.4 Games

Enter topic text here.

Endnotes 2... (after index)



Back Cover

Documents

Commodity Challenge Help - Simpson County...The Set Price alternative allows you to establish the price you want for a cash grain sale. For example, the current cash soybean quote