Managing Price Through Future Markets

AGSC 230

production lag

agricultural goods have a delay between when production decisions are made and when the final product is ready

“spot price”

receive the price at that current time and location

what’s an example of spot price?

cattle sold in auction

what is the name of a market when price is determined at the point of exchange?

spot market/cash market

forward contract

tool used by buyers and sellers to establish a price in advance of the actual exchange of goods

a forward contract is an agreement that stipulates what?

• the quantity to be exchanged

• the price it will be exchanged at

• the quality of the product that will be exchanged

some forward contracts are more formal. what does this mean?

they require legally binding contracts that are signed by both the buyer and the seller

futures contracts

highly standardized form of forward contracts

list all the features that explain a futures contract

• trade through an organized exchange center

• specify a particular quantity and quality of good, delivery date, delivery mechanism, and transaction price

• the payment to and from the buyer and seller is backed by the exchange

• the agreement is backed by a good-faith deposit called a margin

what is the largest US exchange?

CME group

what are the 4 exchanges that make up the CME group?

• Chicago Mercantile Exchange (CME)

• Chicago Board of Trade (CBOT)

• New York Mercantile Exchange (NYMEX)

• Commodity Exchange, Inc (COMEX)

list and describe the names for the different prices in futures contracts.

• last - price the last contracts traded at

• change - difference in price since the prior settle and the last price

• prior settle - last price from the previous day

• open - price the first futures contract that day was sold at (for a given commodity)

• high - highest price of the day so far

• low - lowest price of the day so far

• volume

describe “the price” of contracts

“the price” of the contract for that day is the settlement price

Law of One Price

difference between prices of 2 identical goods in 2 different regions should not exceed transportation costs

(true/false) spot and futures prices should be similar, but not necessarily the same

true