To: Mellissa Koehler

From Emily Errickson

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Date: January 21, 2018

Subject: CME futures recap assignment

 

I am writing this memo to tell
you what I have learned about the futures market on the CME page. CME group offers the widest range of
tradable products available to buyers and sellers. CME is offered in over 150
countries delivering the best prices and easy access to products around the
world. The main thing I learned was about the futures market.  The futures market all started with the central
grain markets, where farmers sell their products for instant delivery. Forward
delivery is different because the contracts are private contracts that are between
the buyer and seller.  Futures are for
the purchase and sale of commodities for future delivery.

 

Forward Contracts and Future contract differences:

 

Forward contracts and futures
contracts are legal agreements to buy or sell an asset on a specific date or
during a specific month. Forward contracts are between buyer and seller, and
contracts might not all be the same. Futures contracts are facilitated through
a futures exchange and is based off quality, quantity, delivery time and place.
The price is negotiated through an auction process that occurs on the Exchange
trading floor or via CME Globex.

Impact on food system:

The futures market impacts the
food system by allowing electronic
access to a broad spectrum of products on a single platform. This makes it
easier for buyers and sellers to execute orders of any size quickly and efficiently,
without effecting a substantial change in price. The farmer can sell their
product futures to hedge the risk of owning or being long the cash commodity. Food
processing companies want in on the futures market to estimate their input
costs, commodity fund managers look for the best
price for different kinds of grain products, energy companies looking to corn available
for them for ethanol production and speculators who wish to profit from their
opinion on which way the market will move either up or down. Each of these
components are equally important in finding a fair price for everyone.

Future Markets uses:

 

The futures market is used to forecast
price by using price, which us found through an auction-like process that
occurs on the Exchange trading floor or via CME Globex, CME Group’s electronic
trading platform. It
responds quickly to information that can affect supply and demand. It also can
be used by people as a gauge as to what is going on in the market. One way futures markets manage risk is by using hedging to reduce or limit the risk
associated with price changes that can happen at any time. Once they use the
futures markets they set a price so their risk is lower. The futures market creates profit for speculators by them accepting the
risk in an attempt to profit from favorable price movement. They make money when
they buy a contract then sell it back for more money they bought it for. They pretty
much forecast what the price is going to be in the future.

 

 

Hedgers and
Speculators:

 

 Hedgers use futures to reduce or limit the risk associated with a price
change. People sell futures on their products to hedge against a drop in
commodity prices. This makes it easier for producers to do long-term planning
in case the price changes and allows them to plan for fixed costs. Hedgers use
the futures market to sell commodity futures contracts to establish a price. Speculators
are individuals trading their own funds. They enter the futures market with
the plan to make a profit from changes in futures prices. They buy stuff whether they know a lot
about it or not and buy low and hope to sell it high with the future contracts
they bought. Hedging is an investment position
intended to offset potential losses or gains that may be incurred if a negative
event happens so your risks are reduced.

 

Agricultural commodity selection:

 

The agriculture commodity that I have chosen is corn. The
reason I have chosen this, is I just went on the agriculture page and just
picked a random commodity and the first one that I saw was corn. Specifications for contracts of this commodity are, corn
is paid in cents per bushel. The contract unit is 5000 bushels and the minimum
price fluctuation Is ¼ of one cent per bushel.