FARE 2410 Course Manual

4 Pages

Food Agricultural and Resource Economics
Course Code
FARE 2410
Wayne C Pfeiffer

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FARE 2410 MIDTERM Section 1: Commodity Futures Markets A futures market involves: 1. Large numbers of buyers and sellers 2. Homogeneous products 3. Free entry and exit 4. Full information 5. Independence and impersonality of decisions What conditions are necessary for a futures market to exist? 1. Units must be homogeneous and describable 2. Commodity must be susceptible to standardization and grades 3. Supply and demand must be large 4. Supply must flow naturally to market, free of government or private constraints 5. Supply and demand must me uncertain 6. Commodity should not be perishable Important facts about future markets: 1. All contracts for a single commodity will be in the same units 2. A commodity may trade on more than one exchange 3. You cannot buy part contract, you must sell or buy a complete contract 4. Trading is authorized only for the months specified to gain volume 5. Futures market is a zero-sum game. Win = Loss, except for commission charges 6. The volume of trade is large enough that you make a trade with no effect on price 7. Traders almost never take or make delivery, they simply offset and close their futures market positions Long Position: When you make a contract to buy corn Short Position: When you make a contract to sell corn Margin: An amount sufficient to cover any short-term price changes To make judgments about prices in the future there are two different approaches: FARE 2410 MIDTERM 1. Fundamental Analysis – based on the concepts on supply and demand 2. Technical Analysis – based on the past patterns of price changes FARE 2410 MIDTERM Volume: The number of futures contracts traded in a particular commodity on a particular day Open Interest: The number of futures contracts outstanding in a commodity (have not been covered) If volume is up, open interest is up and prices are up, it is a “bullish” – New longs are entering the market, and new shorts are only entering the market at higher prices If volume is up, open interest is up and prices are down, it is a “bearish” – New shorts are entering the market, and new longs are only entering the
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