Using derivatives in spot grain market

© 2015 CME Group. All rights reserved.

Using derivatives in spot grain market

28-29 May, 2015

Odessa


Futures Industry: A Historical Perspective


Chicago

Mercantile

Exchange

(CME)

Chicago

Board of

Trade

(CBOT)

New York

Mercantile

Exchange

(NYMEX)

Commodity

Exchange

(COMEX)


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


Price Discovery: Wheat


Uncertainty!

What is the Agricultural Customer's Market Risk?


What is the Most Important Part of Your Business

Buying & Selling

Physical Agricultural Products

Risk Management!


Volatility (Annualized %)

How Do You Measure Market Risk?


Historic Volatility: Corn & Wheat February 2000 – February 2015


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


Economic Functions of Futures

Price

Discovery

Risk

Management

Futures

Markets


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


Basis


Basis: The Key Factor to Successful Hedging

Cash Price

Futures Price

Basis


Basis: Components


Sample of Basis: Nearby Corn versus Gulf Cash


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


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


CME Group wheat futures September 2015

160

180

200

220

240

260

280

September 15 wheat futures, $/t


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




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




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


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




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






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






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


Contracts with a minimum guaranteed price paid at the harvest


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


Fixing minimum price at the harvest with

potential upside for the Producer


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


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


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


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



upside for producer (CME Group December14)

Net amount received: $167/t Net amount paid: 167+7= $174/t


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



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


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


Thank you!

Good luck trading!

Alexandre Bobylov

[email protected]

+44 2033 793 734 (office)

+44 7702 813 651 (mobile)

mailto:[email protected]

Using derivatives in spot grain market

Business

Transcript of Using derivatives in spot grain market