Futures Worksheet
Matching.
____1. Forward Contracta. Take an opposite position in the futures or option market.
____2. Cash Marketb. What you must pay a broker.
____3. Futures contractc. A meeting place
____ 4. Speculatord. Price now deliver your product in the
Future.
____ 5. Hedgere. Used by purchasers of products.
____ 6. Exchangef. Used by a producer of products
____ 7. Optiong. A right but not an obligation on a
Futures contract.
____8. Offseth. buy or sell for a future date through a
Brokerage firm.
____ 9. Basisi. losses occurred when the market goes
Against you.
____10. Long hedgej. delivered and get cash
____ 11. Short hedgek. Supplies liquidity, money
____12. Margin moneyl. Supply product
____ 13. Commissionm. Difference between futures price and the
Local cash price
Steps in a short hedge
Sell in the ______market, buy back ______contract, sell in the ______
Market.
Steps in a long hedge
______in the futures market, sell back in the ______market, buy in the ______
Market.
EXAMPLE IN NOTES
1st. example
Local bid Futures ______Action: ______Dec. futures @2.55
Basis ______
Bid ______
Results (price falls-basis remains the same) (futures sell 2.55 – buy back 2.25=.30)
Basis futures price cash price +/- in futures Net Price
-.25 (buy back)2.25 (sell) 2.00 +.30 = 2.30
Results (price rises, basis same)
Basis futures price cash price +/- in futures Net Price
-.25 (buy back) 2.90 (sell) 2.65 + -.35 = 2.30
TRY THIS same information but Basis -.15, futures price 2.25
Basis futures price cash price +/- in futures Net Price
-.15 2.25 ______= ______
Basis -.10 cash price 2.90
Basis futures price cash price +/- in futures Net Price
-.10 ______2.90 ______= ______
WINTER WHEAT EXAMPLE
Local bid Futures ______
Basis ______
Bid ______
Basis futures price cash price +/- in futures Net Price
______(buy back) ______(sell) ______= ______
Long hedge example!
Local bid Futures 2.70
Basis +-.08
Bid price 2.62
See notes on chart
Long hedge strategy in notes
Local bidFutures 66.00
Expected basis +-2.00
Target price 64.00
March prices futures ______basis ______
Basis futures price cash price +/- in futures Net Price
______(sell back) 68.90 (buy) 67.00 ______= ______
SHORT HEDGE PRACTICE PROBLEM
In July a hog producer wants to lock into price to protect against falling prices for November. Forward contract price for November is 38.00. Futures price 40.00. They sell future contract. As November approaches the cash price is 36.75 and the futures price is 37.25.
Local bidfutures ______
Basis ______
Bid price ______
Basis futures price cash price +/- in futures Net Price
______(buy back) ______(sell) ______= ______
LONG HEDGE PRACTICE PROBLEM
A producer needs to lock in on a price on some wheat for a chicken operation. They fear the price will rise in January due to short supply. Currently the local cash price is 4.25 and the futures price is 4.50. They buy futures contracts. As January approaches the local cash market is at 3.90 and basis is under .40.
Local bidfutures ______
Basis ______
Bid price ______
Basis futures price cash price +/- in futures Net Price
_____ (sell back) ______(buy) ______= ______