Econ 536

Applied Agricultural Marketing

Spring 1999

FUTURES TRADING GAME (FTG)
  1. Glossary:

Here are the definitions of some terms that you may find useful when playing the Econ 536 FTG:

Brokerage Fee: The fee assessed by the brokerage firm for trading on the futures market. For the FTG, the brokerage fee per round-turn will be $45 per contract on any contract.

Contract: A commitment to make or take delivery of a specified quantity of a good at a specified date in a specified location. For the FTG, we will trade only 6 contracts specifying Chicago as the place of delivery. The contracts are May 1999 Corn (5000 bu, delivery in May, 1999), December 1999 Corn (5000 bu, delivery in Dec., 1999), May 1999 Soybeans (5000 bu, delivery in May, 1999), November 1999 Soybeans (5000 bu, delivery in Nov., 1999), June 1999 Lean Hogs (40000 lbs, delivery in June, 1999), and December 1999 Lean Hogs (40000 lbs, delivery in Dec., 1999). (Note: Lean Hogs futures prices represent lean values. The equivalence between lean and live prices is approximately: Live Price = 0.74 ´ Lean Price.)

Initial Margin: The amount of money required for an initial account deposit by the brokerage firm. For the FTG, initial margins for speculation (hedging) are $405 ($300) per contract for corn, $1080 ($800) per contract for soybeans, and $1350 ($1000) per contract for lean hogs.

Long, Short Position: The position that is established by buying or selling, respectively, in a market if there is no offsetting position.

Maintenance Margin: The minimum amount of money required in the brokerage account. For the FTG, maintenance margins for both speculation and hedging are $300 per contract for corn, $800 per contract for soybeans, and $1000 per contract for lean hogs.

Margin Call: Additional funds that a trader with a futures position will be called upon to deposit if his/her brokerage account falls below the maintenance margin. A margin call requires a deposit into the brokerage account sufficient to bring the account balance up to the initial margin.

Open Interest: The total number of contracts that are outstanding and have not been offset by either delivery or an opposite buy-sell transaction.

Open, Close Price: The prices at which the first and last trades, respectively, occurred for a given trading date.

Offsetting: Buying back after selling futures, or selling after buying futures, to cancel previously established futures positions.

Round-Turn: The completion of a "sell and buy back" or of a "buy and then sell" set of transactions.

Trading Date: Dates on which contracts can be traded (Monday through Friday, excluding federal holidays).

Trading Volume: Number of contracts or other measure of trade activity for a particular futures contract or contracts.
  1. Preliminaries:

To trade in the Econ 536 FTG, you must follow these steps:
  1. Access the Internet and go to the address http://wwwcgi.econ.iastate.edu/cgi/536time.exe, which is the page for market orders. You can also go to this address indirectly by following the links from the Department of Economics Homepage (http://www.econ.iastate.edu/).
  2. For your "Username", enter your last name (in small letters).
  3. For your "Password", enter your Social Security Number (in full and without hyphens or spaces). If you want a different password, please email it to the instructor ASAP.
  4. Enter the specifications of your trade, including the contract name, the number of contracts, whether you are buying or selling, the date of the transaction, and whether you want the transaction to be executed at the open price or at the close price of the trading date. Note that the last times to submit an order for the open and the close of a particular trading date are 9:10 AM and 1:00 PM, respectively, of that date.
  5. Click on <Submit Form>.
  6. Click on <Continue>.
  7. Check to make sure that the trade acknowledged in the message is the trade you intended to make.
  8. Write down the trade you made on a separate sheet of paper and do not lose it. This is the only record you have of the trade you made.
  9. If you make a mistake, simply make an offsetting trade. That is, if you submitted a sell (buy) order by mistake, to "correct" it you must then submit a buy (sell) order with the same specifications.
  10. After submitting a trade, you can click on <Back> (using Netscape) to return to the form with the same trade specifications as the one you just submitted.
  1. Getting Acquainted with Futures Trading:

To get acquainted with the basics of futures trading, during the period Jan. 15, 1999 through Feb. 8, 1999 make at least 3 simulated round-turn trades using the Econ 536 FTG. The futures contracts available for trading are May 1999 Corn, December 1999 Corn, May 1999 Soybeans, November 1999 Soybeans, June 1999 Lean Hogs, and December 1999 Lean Hogs. Compute the total profits on each set of trades. Please note that these trades are designed for you to get acquainted with trading; don't submit any written report on these transactions.
  1. Trading as a Speculator:

    2. Using the Econ 536 FTG to submit all of your trades, during the period Feb. 9, 1999 through March 5, 1999 trade as a speculator in one of the available futures contracts (i.e., May 1999 Corn, December 1999 Corn, May 1999 Soybeans, November 1999 Soybeans, June 1999 Lean Hogs, and December 1999 Lean Hogs). Assume that you have an initial capital of $20,000 available to speculate and that you cannot borrow additional funds. Orders will not be accepted after 11:50 AM on March 5, 1999. You should start trading soon. You must make a minimum of two round-turns of futures trading as a speculator, so that you must make at least four trades. You must keep your speculative futures position open for at least 3 trading days.

  2. Trading as a Hedger:

    3. Using the Econ 536 FTG to submit all of your trades, during the period Feb. 9, 1999 through March 5, 1999 trade as a hedger in one of the available futures contracts (i.e., May 1999 Corn, December 1999 Corn, May 1999 Soybeans, November 1999 Soybeans, June 1999 Lean Hogs, and December 1999 Lean Hogs), but different from the one you chose to trade as a speculator. Assume that you own 27000 bu of corn, 17000 bu of soybeans, and 135000 lbs of live hogs, and that you want to hedge one of these long physical positions (you have to choose which one of these three commodities you will hedge). Assume also that you have an initial capital of $10,000 available to hedge and that you cannot borrow additional funds. Orders will not be accepted after 11:50 AM on March 5, 1999. You should start trading soon. You must make a minimum of two round-turns of futures trading as a hedger, so that you must make at least four trades. You must keep your hedging futures position open for at least 3 trading days.

  3. Written Report:

Prepare a report based on your experience with the FTG. The report is due by March 12, 1999. The report should be typed and should include:
  1. A description of the cash-futures price relationship for each of your chosen commodities. (That is, in theory, how do you expect cash prices and quantities of your chosen commodities to vary over time? How do you expect the cash prices of your chosen commodities to be related to their respective futures prices?)
  2. A computer-generated graph (using a spreadsheet package such as Excel, Lotus, Quattro, etc.) of the closing futures and cash prices for each of your chosen commodities for the period Feb. 9, 1999 through March 5, 1999. (For the FTG, you may use either the cash prices pertaining to your locality or the following cash prices:

Corn: Average of North-Central Iowa

Soybeans: Average of North-Central Iowa

Hogs: Average of Iowa-Southern Minnesota 220-260 lbs US 1-3 46-49% Carcass Base Lean Country Points

You may access the aforementioned cash prices from the Econ 536 Homepage. In your written report, be careful to specify which cash prices you used for the FTG.)
  1. A discussion of the observed futures-cash price relationship for each of your chosen commodities for the period Feb. 9, 1999 through March 5, 1999.
  2. A summary of your trading activities and pro and con arguments underlying each trading decision.
  3. A record of your transactions and margin accounting for both your speculative and hedging positions, including your final profits as a speculator, and a comparison of the effective prices obtained with and without hedging. Use the brokerage fees, initial margins, and maintenance margins reported above in the "Glossary" section. For your accounting, please use the format shown in the worksheet ftg.xls (downloadable from the course webpage : http://www.econ.iastate.edu/classes/econ536/lence/); you should simply submit a separate printout of this worksheet for each of the futures contracts traded.
  4. A discussion of your overall reaction to the trading experience. What are the most significant things (theory and practice) that you have learned in this exercise? How comfortable would you feel in real-life speculative trading? How comfortable would you feel in real-life hedging?
  1. Grading:

Your grade for the FTG will be based on the quality of your written report for the points listed above, and not on whether you post a final profit or loss. Remember that the written report is due by March 12, 1999 (if sent by mail, it must be postmarked by March 12, 1999); late reports will be penalized at the rate of 10% of this assignment's maximum possible grade per day of delay.