There are three major uses of Ethanol: beverages, industrial products, and an alternative fuel source.
With worldwide demand for energy on the rise, ethanol is becoming more attractive as a renewable, environment friendly fuel that enhances the nation's economy and its energy independence.
The amount of fossil fuel required for 85% of the time is E85, which still requires 15% gasoline and 85% of the time.
15 billion gallons per year is an amount that represents 10% of the U.S. gasoline supply.
18 million U.S. consumers drive Flexible Fuel Vehicles, but there are more essential features of a futures contract.
Flexible Fuel Vehicles will make up 25% of new cars sold in 2015.
The futures market includes how profits are made and lost.
For example, market and the basic characteristics of these investments, describe the commodities segment of the futures.
Discuss the trading strategies investors can use with individual commodities or trading financial futures, and explain how investment returns are should understand how these specialized and often high-risk measured.
This chapter will show you how to use futures contracts as a risk management tool.
Discuss the growing role of financial futures in the market today and explain the difference between a physical commodity and a financial future.
The items have one thing in common.
They are all real investments.
The market for commodities and financial futures is more exotic and involves a lot of speculation.
The payoffs can be amazing with some luck.
The need for patience and know-how is more important than luck.
These are investment products that require specialized investor skills.
Over the past few decades, the amount of futures trading in the United States has grown.
More and more investors are using futures trading as a way to earn attractive, highly competitive rates of return.
The number and variety of futures contracts now available for trading is one of the main reasons for the growth of futures trading.
Commodities such as grains and metals, crude oil and gasoline, as well as processed commodities, need futures contracts to be traded.
You can buy put and call options on futures contracts.
The cash price paid to the seller is what the bushel changes hands for.
The transaction is completed in its entirety for all practical purposes.
Traditional securities are traded in this market.
The seller wouldn't deliver the wheat until there was a mutually agreed upon date in the future.
The transaction wouldn't be completed for a while.
The buyer would own a highly liquid futures contract that could be held or traded in the futures market.
The seller has a binding obligation to deliver wheat on a date in the future if the contract is still outstanding.
The buyer/holder has an obligation to deliver the underlying commodity.
Each market has its own contract specifications.
The delivery procedure and delivery month are included.
The life of the contract is defined by when the commodity or item must be delivered.
The Chicago Board of Trade specifies that each of its full-sized soybean futures contracts will involve 5,000 bushels of USDA No.
The delivery months are January, March, May, July, August, and September.
The futures contracts have their own trading hours.
Unlike listed stocks and bonds, which begin and end trading at the same time, normal trading hours for commodities and financial futures vary widely.
The S&P 500 stock index is priced at $250 and the S&P 500 futures are priced at $515,625.
The values are representative of those that existed on July 9, 2015.
There is more than one set of hours for open-outcry or floor trading.
CME Globex gives traders access to futures products on any exchange for nearly 24 hours a day, 5 days a week from anywhere in the world.
There is a cross section of 14 futures.
The market value of a single contract is determined by the latest quoted price of the underlying commodity and the size of the contract.
If coffee is trading at $1.252 a pound, the market value of one contract is 37,500, which is $46,950.
The typical futures contract covers a lot of the underlying product or financial instrument.
The amount of investor capital required to deal in these vehicles is relatively small because all trading in this market is done on a margin basis.
Call options are closely related to futures contracts.
Both involve the future delivery of an item at an agreed upon price.
There is a difference between a futures contract and an options contract.
A futures contract obligates a person to buy or sell a specified amount of a commodity on or before a stated date.
An option gives the holder the right to buy or sell a specific amount of a real or financial asset at a specific price over a specified period of time.
The futures contract does not specify the price at which investors can buy or sell the underlying asset.
The delivery price is set at the price the contract sells for.
If you bought a corn futures contract three months ago at $4.00 a bushel, that's the price you'll pay to take delivery of the underlying product, even if the contract trades at $4.50 a bushel at its date of expiration.
The risk of loss with an option is limited to the price paid.
There is no limit on exposure to loss in a futures contract.
While options have an up-front cost, futures contracts do not.
A margin deposit is involved in the purchase of a futures contract, but it's not a sunk cost like an option premium.
When individuals who produced, owned, and/or processed foodstuff sought a way to protect themselves against adverse price movements over 170 years ago, modern futures contracts were born.
The futures contracts came to be traded by individuals who were not connected with agriculture but who wanted to make money by speculating on their price swings.
The Chicago Board of Trade was the first organized commodities exchange in this country.
More markets opened over time.
More than a dozen U.S. exchanges qualify as designated contract markets and deal in listed futures contracts.
Designated contract markets are boards of trade that are regulated by the U.S.
DCMs can list futures or options based on any underlying instrument.
Most of the trading takes place on a few exchanges.
The Chicago Mercantile Exchange has as much trading volume as all other futures exchanges combined.
The Chicago Board of Trade and the New York Mercantile Exchange are both owned by the Commodity Exchange, Inc.
Roughly 85% of the trading on U.S. futures exchanges takes place on these four exchanges.
The merger of the CBOT and the CME in July of 2007, created the CME Group.
The NYMEX and COMEX were acquired by the CME Group in August of 2008.
Many commodities and financial futures are traded on more than one exchange.
Three billion contracts have been traded on futures exchanges over the course of a year.
Exchanges now conduct trading elec tronically.
The S&P 500 futures contracts are traded in open outcry by the CME Group.
The options on futures contracts continue to be traded on the floor.
The first global electronic futures trading platform was created in 1992.
Globex provides an inter national link among futures exchanges and offers trading more than 23 hours a day.
From 9 percent of trading volume in 2000 to 100 percent, electronic trading of futures con tracts has grown.
The most actively traded futures contract in the world is the Eurodollar contract.
Three-month Eurodollars, the E-Mini S&P 500 Stock Index, and the U.S. are the most actively traded contracts on the Globex.
More than half of futures trading volume on the U.S. exchanges is for 10-year Treasury Notes.
The system of open-outcry and hand signals used by traders used to indicate whether they wanted to buy or sell.
The number of contracts a trader wanted to buy or sell was indicated by the fingers held vertically.
The fraction of a cent above or below the last traded full-cent price is what the trader would buy or sell.
The futures market has hedgers and speculators.
Without either one, the market couldn't exist.
A rancher might enter into a futures contract to lock in the price of his herd before selling it.
The rancher's revenues are predictable and not affected by the price of cattle.
The underlying strength of the futures market is the reason for its exis tence.
Hedgers are companies whose businesses are affected by swings in financial variables such as interest rates or exchange rates.
Hedgers include financial institutions and large corporations.
They don't have an interest in the commodity or financial future other than the price action and potential capital gains.
The futures market is more liquid because of speculators' trades.
Once futures contracts are created, they can be traded.
Like common stocks, futures contracts are bought and sold through local offices.
There is no difference between dealing in stocks and bonds and trading futures.
Margin trading is standard practice and the same types of orders are used.
Any investor can buy or sell any contract with any delivery month, as long as it is currently being traded on one of the exchanges.
It is similar to going long or short with stocks.
A speculator wants the price to go up and a short seller wants it to go down.
An off setting transaction can be used to liquidate long and short positions.
The short seller would cover her position by buying an equal amount of the contract.
The rest is offset before the delivery month.
The commission costs on both ends of the transaction are included in a round-trip commission.
MyFinanceLab are less expensive than a pit broker.
Buying on margin only puts a small portion of the total price in cash.
The amount of equity that goes into a deal is called margin.
The futures con tracts are traded on a margin basis.
The margin is usually 2% to 10% of the contract value.
The margin required for stocks and most other securities is very low.
The investor doesn't need to borrow money to finance the balance of the contract.
It exists to make sure that the contract is fulfilled.
The margin deposit is not a partial payment for the commodity or financial instrument, nor is it related to the value of the underlying product or item.
The dollar amount is specified for the required margin deposit.
It depends on the price of the underlying commodity or financial asset.
Depending on the exchange on which the commodity is traded, it can vary.
The margin requirements for 14 commodities and financial instruments are listed in Table 15.2.
Margin requirements are very low compared to futures contracts.
The initial margin requirements for speculative and nonmember products are set at 110% of the maintenance margin requirement for a given product.
The initial margin requirements for all products are set at 100% of the maintenance margin requirement.
Customers are expected to live up to the requirements of the margins.
Exchange-minimum margin requirements can be changed frequently.
The requirements in this table are subject to change on short notice.
On the exchange's website, the actual margin requirements for a specific type of transaction are reported.
After the investment is made, the market value of a contract will rise and fall as the quoted price of the underlying commodity or financial instrument goes up or down, triggering changes in the amount of margin on deposit.
The minimum amount of margin that an investor must keep in the account is established by the maintenance margin.
If the initial margin is $1,100 per contract, the maintenance margin is $1,000.
The investor has no problem if the market value of the contract does not fall by more than $100.
The investor needs to deposit money immediately to bring the margin back to normal.
The gain or loss in a contract's value is determined at the end of each session.
The account is credited or debited at that time.
An investor may be required to make additional margin payments in a falling market.
Failure to do so will leave the broker with no choice but to close out the position and sell the contract.
Explain how it is used as an investment vehicle.
Grains, metals, wood, and meat are physical commodities.
They have been traded in this country for a long time.
Commodities trading is the focus of the material that follows.
The basic characteristics and investment merits of these contracts are reviewed.
There is no differentiation of supplier for commodities.
A commodity is qualitatively the same regardless of the supplier.
A Troy ounce of gold from a mine in Uzbekistan is the same as a Troy ounce of gold from a mine in Indonesia.
If the underlying com modity meets the contractual standard, it can be traded with futures.
The market for commodity contracts is divided into six categories: agriculture, metals, livestock, food, energy, and other.
The trading mechanics and procedures are unaffected by this.
It provides a convenient way of grouping commodities based on their underlying characteristics.
A number of the contracts in Table 15.3 are available in several forms or grades.
The weather is not included in Table 15.3 so you don't have to worry about butter, cheese, and other commodities.
Governments, companies, or individuals can not be traded widely.
Every commodity, whether actively or thinly traded, has certain specifications that spell out in detail the amounts and quality of the product being traded.
Weather futures are traded on the CBOT.
You can see that the corn futures price is based on the weather index, and that it represents 5,000 bushels of yellow corn.
For a premium or discounted price, the contract allows for the delivery of grades on any weather variation, such as #1 or #3 yellow corn, but for a premium or discounted price.
The contract specifies the hours of trading, snow, and even hurricanes.
The exchange rule indicates the listing exchange hedge against shifts in demand and the trading rules and regulations that apply when trading the contract, which can be found in the middle of the page of companies.
Since the daily settlement price is used to determine the daily market value of a con against rainy weekends, parks can use it to protect themselves, as well as margin their peak summer seasons.
The final settlement price at the end of protect against lost revenue is the prior settle price.
The settle applications are quite high for the December 2016 corn futures contract.
Because corn futures are quoted in the Chicago Mercantile Exchange, the six following the apostrophe means 6/8ths of a cent.
The minimum price for corn futures in 1999 is 1/6th of one cent.
The market value of the weather contract is 5,000 frost, snow, and hurricanes, which is why the contract is called a weather contract.
This text does not explain the reasons why commodity prices change.
They move up and down just like any other investment, which is exactly what speculators want.
Even a small price change can have a huge impact on the market value of a contract because we are dealing in such large trading units.
The value of a single contract will change by $1,000 if the price of corn goes up or down by a small amount.
It is easy to see the effect this kind of price behavior can have on investor returns, since a corn contract can be bought with a $1,375 initial margin deposit.
The contract specifications for futures contracts can be found on the listing exchange website.
When buying or selling futures contracts, traders agree to uphold the terms of the contract.
A corn futures contract calls for the delivery of 5,000 yellow corn by the end of the second business day after the last trading day of the delivery month, which would be the contract's expiration month.
Key information about various commodities can be found in online quotations.
The daily last, open, high, and low prices are included in the quotation.
It also shows the change in price from the previous day's closing price to the current day's last price and the previous day's settlement price.
If you consider the current day's low price relative to the prior day's settle price, the price swing is even larger.
In this case, March 2016 corn dropped $0.06 per bushel or $100 per contract.
The price swings are on a single contract.
The impact of these small changes can quickly add up to significant profits or losses depending on the number of contracts, especially relative to the small initial investment required.
Such price behavior is one of the magnets that attract investors.
The exchanges try to keep price fluctuations in check by imposing daily price limits and maximum daily price ranges.
A corn futures contract has an initial price limit of $0.30 and an expanded price limit of $0.45 per bushel.
The daily price limit on corn is $0.30 and the maximum daily range is $0.
The Hi/Lo limits are determined by the prior day's settlement price plus and minus the daily price limit.
There are no price limits on the month contract on or after the second business day preceding the first day of delivery, because futures prices can become volatile as the contract nears its end.
There is plenty of room to make a quick profit.
The daily price limits on one corn futures contract equates to a per day change in value of $1,500 to unlimited depending on the contract and prior pricing.
Capital gains are the only source of return for futures contracts.
There is no current income.
The volatile price behavior of futures contracts is one reason why high returns are possible.
It takes a small amount of money to control a large investment position and participate in the price swings that accompany futures contracts, because all futures trading is done on margin.
An investment can be wiped out in a matter of days with the use of leverage.
The standard holding period return formula bases the investment's return on the amount of money actually invested in the contract rather than on the value of the contract.
The return on invested capital can be determined using a simple formula.
Equation 15.1 can be used for both long and short transactions.
If you deposited the required initial margin of $2,750, you can see how it works.
Your investment is only $2,750, but you have control of 10,000 corn acres worth $44,700 at the time of purchase.
If the market value of your position is equal to 10,000, you'll get $45,800.
You decide to take your profit at this point.
blazing new operations became less profitable as they became famous as a business pioneer.
There are new trails in the market for trading risk.
In the 1980s, the company expanded into price of natural gas, which meant that areas such as water, foreign power sources, telecom, and broadband services were exposed to price fluctuations.
The opportunities in the commodities business were moved from the core businesses of supplying gas to the new ones.
The company tried to hide their losses by using the New York Mercantile Exchange, but didn't take into account regional discrepancies in gas prices.
Financial institutions were able to fill the void by agreeing to deliver natural gas to Enron, which was essentially a shell game.
In addition to trading natural gas and other energy ances from its founder and CEO Ken Lay, in the late 1990s Enron began trading into a death spiral that ended in bankruptcy on weather derivatives.
The bets were on the weather.
In July 2004, Lay was indicted on 11 counts of weather-derivatives transactions were worth a securities fraud.
He was found to have an estimated $3.5 billion in the United States.
Legal experts said Lay could face 20 to 30 years in profitable if his trading business continued.
The company once offered more prison.
Three and a half months before his scheduled sentencing, Ken Lay died while on vacation in Colorado, ranging from oil and natural gas to weather derivatives.
As a result of his death, the federal earned most of its revenues from trading derivatives.
Lay's conviction was thrown out because of exchang.
As the energy business matures, what actions should be taken?
The high rate of return was due to both the increase in the price of the commodity and the fact that you were using very low margin.
Individual investors are reluctant to sell their stocks because of the initial margin.
There are three forms of investing in commodities.
Some of the benefits of volatile commodities prices are captured in this trading technique.
A hedge in the commodities market is more of a technical strategy that is used by producers and processors to protect a position in a product or commodity.
A producer or grower would use a commodity hedge to get a better price for their goods.
The manufacturer who uses the commodity would use a hedge to get the goods at the lowest possible price.
A successful hedge means more predictable income to producers.
To gain a better understanding of how to use commodities as investments, let's look at the two trading strategies that are most used by individual investors.