Animal Science and the IndustryAnimal Science and the Industry

Common Core/Next Generation Common Core/Next Generation Science Standards Addressed Science Standards Addressed

CCSS.ELA-Literacy.RH.9-10.4 - Determine the meaning of CCSS.ELA-Literacy.RH.9-10.4 - Determine the meaning of words and phrases as they are used in a text, including words and phrases as they are used in a text, including vocabulary describing political, social, or economic aspects vocabulary describing political, social, or economic aspects of history/social science.of history/social science.

WHST.9-12.9 - Draw evidence from informational texts to WHST.9-12.9 - Draw evidence from informational texts to support analysis, reflection, and research. (HS-PS1-3support analysis, reflection, and research. (HS-PS1-3

HSA-SSE.A.1 - Interpret expressions that represent a HSA-SSE.A.1 - Interpret expressions that represent a quantity in terms of its context. (HS-PS2-1),(HS-PS2-4)quantity in terms of its context. (HS-PS2-1),(HS-PS2-4)

Bell Work Bell Work

What is a future ?What is a future ? What is a market ?What is a market ? Name 3 places you can check the Name 3 places you can check the

futures marketfutures market

Understanding Futures Understanding Futures Contracts and Governmental Contracts and Governmental

ProgramsPrograms

Interest ApproachInterest Approach

Tell students that you will give them one point for Tell students that you will give them one point for each extra credit assignment they turn in today.each extra credit assignment they turn in today.

Next, tell them you might give them three points Next, tell them you might give them three points for each extra credit assignment they turn in for each extra credit assignment they turn in next week, but they have to do them today. Ask next week, but they have to do them today. Ask the students which they would prefer, one point the students which they would prefer, one point today or maybe three points next week. Is it today or maybe three points next week. Is it worth hurrying to get them done if you only get worth hurrying to get them done if you only get one point instead of three?one point instead of three?

Student Learning ObjectivesStudent Learning Objectives

Describe the futures marketDescribe the futures market

Describe HedgingDescribe Hedging

Explain margin calls and option contractsExplain margin calls and option contracts

TermsTerms

BasisBasis

Futures priceFutures price

Hedging Hedging

MarginMargin

PutPut

What is the futures market?What is the futures market?

It is the complex It is the complex system of selling system of selling commodities using commodities using forward pricing forward pricing

• Uses futures pricing Uses futures pricing in trading in trading commoditiescommodities

Future price is Future price is the quoted price the quoted price for a commodity for a commodity to be delivered in to be delivered in a pre-determined a pre-determined month.month.

This does not guarantee the actual price of This does not guarantee the actual price of the commodity, it is only an estimate.the commodity, it is only an estimate.

Actual price will be based on a number of Actual price will be based on a number of factors present in the future.factors present in the future.

What is hedging?What is hedging?

Hedging is the use of futures market to set Hedging is the use of futures market to set a price for future commodities.a price for future commodities.

In order to set the selling price, producers In order to set the selling price, producers must sell a futures contract ensuring the must sell a futures contract ensuring the delivery of their commodity at a specific delivery of their commodity at a specific time.time.

True hedge involves True hedge involves the producer selling the producer selling their commodity on the their commodity on the cash market and cash market and buying back the buying back the futures contract at the futures contract at the same time.same time.

BasisBasis is the difference is the difference in price between these in price between these two transactions.two transactions.

Difference is Difference is commonly the cost commonly the cost of transportation.of transportation.

Ex. Transportation Ex. Transportation costs are high for costs are high for livestock, therefore livestock, therefore the basis for the basis for livestock is livestock is negative.negative.

Basis risk occurs when the basis is higher Basis risk occurs when the basis is higher than the anticipated basis.than the anticipated basis.

To prevent loss, the producer can follow To prevent loss, the producer can follow through with the original futures contract.through with the original futures contract.

Producer must be sure that the product meets the Producer must be sure that the product meets the contract specifications.contract specifications.

What are margin calls and option What are margin calls and option contracts?contracts?

A A margin callmargin call occurs when the contract holder occurs when the contract holder has to put up a margin.has to put up a margin. MarginMargin is a minimal amount of money paid towards a is a minimal amount of money paid towards a

futures contract.futures contract.

Margin calls Margin calls can be can be troublesome troublesome because they because they require a require a large sum of large sum of money on money on short notice.short notice.

Before placing a hedge it is important to Before placing a hedge it is important to know the cost of producing the product know the cost of producing the product and have extra money available to meet and have extra money available to meet any unexpected margin calls.any unexpected margin calls.

There are options available to help There are options available to help eliminate margin callseliminate margin calls One option is called a putOne option is called a put

PutPut is a contract that allows the producer to back is a contract that allows the producer to back out of the trade.out of the trade.

Similar to an insurance policy for the seller, they Similar to an insurance policy for the seller, they are guaranteed the price they want to sell at.are guaranteed the price they want to sell at.

The other option is a The other option is a call optioncall option

A A call optioncall option gives the gives the buyer the right to force buyer the right to force the seller to sell on the seller to sell on demand.demand.

This is like an This is like an insurance policy for the insurance policy for the buyer, they are buyer, they are guaranteed the price guaranteed the price they want to buy at.they want to buy at.

ReviewReview

What is the futures market?What is the futures market? What is hedging?What is hedging? What are margin calls and option contracts?What are margin calls and option contracts?

The End!The End!