From Spot to Futures. Part 1
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This document discusses the characteristics that a market needs to support a futures market. Specifically, it states that the underlying spot market must have significant pricing influence, be tradable with multiple buyers and sellers, and have standard quality specifications and sufficient infrastructure for delivery. It provides examples of demand markets and gateway markets that typically meet these requirements to serve as the basis for an agricultural futures contract.
From Spot to Futures. Part 1
- 1. ? 2017 CME Group. All rights reserved. Tim Andriesen, Managing Director, Agricultural Products CME Group From Spot to Futures B
- 2. ? 2017 CME Group. All rights reserved. ? There is a spot price at every point grain is delivered. ? Many of these markets are simply ¡°freight off¡± of other more significant markets. ? To support a futures market, the spot market has to have significant pricing influence. ? These are typically Terminal Markets: ? Demand Markets: Where grain is consumed or transformed. ? Gateway Markets: Where grains is concentrated for shipment. A Market Must Have Price Influence 2
- 3. ? 2017 CME Group. All rights reserved. Price Influence¡. 3 What is grain worth here?
- 4. ? 2017 CME Group. All rights reserved. Domestic Demand Market 4 Grain Processor
- 5. ? 2017 CME Group. All rights reserved. Terminal market for export 5 Barge Terminal NOLA (Export)
- 6. ? 2017 CME Group. All rights reserved. The ¡°better of¡± 6 Grain Processor Barge Terminal
- 7. ? 2017 CME Group. All rights reserved. ? While some markets have significant price influence, they are not all ¡°tradable¡± by market participants. It Must Be Tradable 7
- 8. ? 2017 CME Group. All rights reserved. Destination Demand markets are difficult to trade as one or two market participants may have control over the price. Multiple Seller ¨C Few Buyers 8 Grain Processor
- 9. ? 2017 CME Group. All rights reserved. Multiple Sellers ¨C Multiple & Buyers 9 Delivery Locations 6 to 7 barges (Daily Load-out) 5 barges (Daily Load-out) Less than 5 (Daily Load-out)
- 10. ? 2017 CME Group. All rights reserved. ? There are logical and reasonable units sizes (trucks, rail cars, barges). ? There is a common quality specification. ? The price in the physical market is reasonably transparent (brokers help). ? There is sufficient transportation infrastructure to deliver and load out. It is better if¡ 10
- 11. ? 2017 CME Group. All rights reserved. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments 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 either a futures or 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 traders cannot expect to profit on every trade. All references to options refer to options on futures. Any research views expressed those of the individual author and do not necessarily represent the views of the CME Group or its affiliates. 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. All examples 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 rulebook of the organizations. Current rules should be consulted in all cases concerning contract specifications 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. Copyright ? 2017 CME Group. All rights reserved. Disclaimer
- 12. ? 2017 CME Group. All rights reserved.