How does the clearing house determine margin requirements for member firms?
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The clearing house compares the margin deposit with the current market price of the futures contract.
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How does the clearing house determine margin requirements for member firms?
The clearing house compares the margin deposit with the current market price of the futures contract.
What is the role of the CFTC in relation to futures exchanges?
To review and ensure compliance with established trading rules.
What do long positions in futures indicate?
They are bullish.
What does being 'long' mean in the context of futures contracts?
It refers to a person who has purchased a futures contract that is still open.
What is hedging in the context of commodity futures?
Hedging is the establishment of a futures position that’s the opposite of a cash position to reduce the risk of adverse price fluctuations.
What happens when the trader in San Francisco offsets their obligation?
They buy one contract from a trader in Detroit, who replaces them as a short on the books of the clearing house.
What is the primary benefit of futures exchanges for producers and users of cash commodities?
They allow for hedging, which substantially reduces the risk of adverse price fluctuations.
What happens if a member firm's equity decreases due to adverse price movement?
The member firm will be required to deposit additional margin.
How does a cash forward contract differ from a futures contract?
A futures contract is standardized and not personally negotiated, while a cash forward contract is negotiated between buyer and seller.
What is the buyer's liability when purchasing a contract of corn at $2 per bushel?
The buyer is contingently liable for accepting 5,000 bushels of corn and paying $10,000.
What is the primary interest of a hedger in the futures market?
Shifting the risk of loss on the cash commodity due to adverse price changes.
What role does the clearing house play in the delivery process?
The clearing house ensures that all intermediate parties are not involved in the final delivery and payment for the cash commodity.
What benefit does hedging provide to producers or users regarding credit?
It allows them to obtain credit at more favorable rates.
Which commodities allow for premium and discount grades in futures contracts?
Grains like wheat and corn, but not soybean oil and soybean meal.
How are contracts cleared on CME and ICE exchanges?
CME contracts are cleared by the CME Clearinghouse, while ICE contracts are cleared by ICE Clear U.S., ICE Clear Europe, or ICE Clear Singapore.
Who can transact orders on the floor of a futures exchange?
Only members of the exchange.
What is day trading?
Establishing and closing out a position during the same trading session.
What happens to the original buyer in New York if the seller in Los Angeles offsets their position?
There’s no impact on the buyer; the clearing house will provide a new short for delivery if the long chooses to stand for delivery.
What are the two large conglomerate firms that run futures exchanges?
CME Group and Intercontinental Exchange (ICE).
Who typically acts as a hedger in the futures market?
Businesspersons who produce or use the actual cash commodity, such as farmers or wheat millers.
What must a trader do if they remain long beyond the last trading day?
They must accept delivery of the cash commodity.
How does hedging affect the profit margin for producers or users of cash commodities?
It allows them to operate at a lower profit margin since they do not need to add extra amounts to offset risk.
What role do speculators play in the futures market?
Speculators buy and sell futures contracts to profit from anticipated price changes, accepting risks that producers seek to avoid.
What are the obligations of buyers and sellers in a futures contract?
The buyer must take delivery and make payment, while the seller must deliver the cash commodity.
What role do speculators play in the futures market?
They assume the risk that hedgers are trying to avoid.
What occurs when a trader in Boston sells their contract to a new buyer in Cleveland?
The Boston trader cancels their obligation to take delivery and is out of the market.
How does an individual hedge against a price decline in cash wheat?
By selling futures contracts to offset potential losses from the decline in cash wheat prices.
What is the role of the Floor Committee?
Establishes rules regarding trading on the floor and settles disputes related to transactions.
What is prohibited in the trading of commodity futures?
Side transactions from outside of the trading pits.
What is the role of the clearing house in commodity futures exchanges?
To clear all purchases and sales transacted by member firms during a trading session.
What is a cash forward transaction?
An agreement for delivery of a specified amount of a cash commodity at a specified time, price, and delivery point.
What is a thin market?
A market with relatively few participants, leading to inefficiency and large fluctuations in prices.
What does being 'short' mean in futures trading?
It refers to a person who has sold a futures contract that is still open and has an obligation to deliver the commodity.
What does the Business Conduct Committee do?
Investigates complaints against members and prevents price manipulation.
What is the key difference between cash forward contracts and futures contracts?
Cash forwards are personal and customizable, while futures are exchange-traded with predetermined delivery sizes and basis grades.
What does the clearing house do once it receives a report of a trade?
Acts as a buyer to all sellers and a seller to all buyers.
What happens if a market is especially volatile regarding variation margin?
The clearing house has the right to call for variation margin during the trading session.
What is the significance of fungibility in CME and ICE contracts?
CME contracts are interchangeable with other CME contracts, and ICE contracts are interchangeable with other ICE contracts.
What is the significance of the Chicago Board of Trade (CBOT) in futures contracts?
Futures contracts executed on the CBOT are always for specific amounts, such as multiples of 5,000 bushels of wheat.
What do speculators aim to achieve in the futures market?
They aim to buy and sell in order to make a profit.
What occurs when a trader in Los Angeles sells a contract of corn and a trader in New York buys it?
The seller incurs the obligation to deliver, and the buyer incurs the obligation to take delivery.
What is the primary purpose of hedging in futures trading?
To transfer risk from producers or users to speculators.
How does a trader offset their position?
By making an opposite trade on the same exchange with the same underlying commodity and delivery month.
What is the function of the Arbitration Committee?
To settle disputes arising between members, member firms, and the public.
Who supervises trading in commodity futures?
The Commodity Futures Trading Commission (CFTC).
What must a customer do to establish a position in a futures contract?
Go through a firm registered as a futures commission merchant and a clearing member of the exchange.
How can buyers and sellers remove their obligation of delivery in a futures contract?
Through the process of offsetting their futures positions.
What is the main difference between cash forward transactions and futures contracts?
Cash forward contracts are non-transferable and can be for any amount and quality, while futures contracts are standardized and transferable.
What is the concern of an individual who is short cash in the futures market?
They are worried about rising prices when they need to buy the commodity to fulfill a delivery commitment.
What is a commodity futures contract?
A standardized contract set by an exchange that includes size, delivery point, grade, and price of the commodity.
What is the purpose of allowing substitute grades in futures contracts?
To increase the supply of deliverable commodities and minimize the possibilities of 'corners' or 'squeezes'.
What is one function of a futures exchange?
To serve as a focal point for buy and sell orders, establishing commodity values.
What role do speculators play in the futures market?
They assume the risk that hedgers are trying to avoid.
What must be deposited with the clearing house before the opening of trading on the next business day?
Both original margin and variation margin.
What is 'open outcry' in trading?
A method where brokers announce bids and offers in a loud and clear voice for others to hear.
Who are referred to as floor brokers?
Members who execute customer orders on the trading floor.
What happens if a floor broker fails to execute orders properly?
They are responsible for any losses caused by their errors.
What is the relationship between cash commodity prices and futures prices when hedging?
Typically, if the cash price rises or falls, the futures price will also rise or fall, allowing for offsetting gains and losses.
What is the settlement process for member firms with the clearing house?
The clearing house settles all positions daily, requiring payment from member firms by the next business day.
What are the obligations of parties in a cash forward contract?
The seller must deliver the commodity, and the buyer must pay for the commodity upon receipt.
How does a hedger typically hedge a long cash commodity position?
By selling futures contracts.
What is included in the CME Group?
Chicago Board of Trade (CBOT), Chicago Mercantile Exchange (CME), CME Globex, Kansas City Board of Trade, Minneapolis Grain Exchange, New York Commodities Exchange (NYMEX), and Commodities Exchange (COMEX).
What is a switch order in futures trading?
An order that allows a trader to offset an original position and reestablish it in a later delivery month.
What happens when the price of cash wheat declines while holding a futures position?
The loss in cash will be matched by a gain in the futures market, reducing overall risk.
What is required for member firms to clear trades with the clearing house?
Member firms must deposit original margin for the trades they clear.
What do short positions in futures indicate?
They are bearish.
What are the obligations of the seller and buyer in a futures contract?
The seller must deliver the cash commodity, and the buyer must take delivery and pay for it.
How are trades reported in the futures market?
A floor reporter makes note of the trade and reports it on the ticker tape.
What is necessary for a futures market to react naturally to supply and demand?
A minimum amount of government control over prices and production.
How is the settlement price established by the clearing house?
It is typically a price within the range of the contract's closing prices or a nominal price if no trading occurs.
What does the notice of intention to deliver contain?
Information regarding the grade, weight, place, and date of delivery.
What is the basis grade in a futures contract?
The standard grade of the commodity determined by the exchange that may be delivered.
What is the typical percentage of futures contracts that are offset before expiration?
Approximately 98%.
What type of market does the futures exchange provide for producers or users?
An alternate market for buying or selling cash commodities.
What responsibilities do exchanges have regarding commodity contracts?
Establish specifications of contracts, delivery months, margin requirements, and rules to prevent price manipulation.
Who are floor traders in the futures market?
Members who trade for their own accounts, also known as 'locals' or 'scalpers'.
What types of commodities have historically been traded on futures exchanges?
Grains, soft commodities, metals, and energy products.
What is variation margin?
Additional margin required by the clearing house if the member firm owes money.
How can a buyer eliminate their obligation of accepting delivery of the cash commodity?
By selling their long position.
What is the significance of a central point for risk capital in futures exchanges?
It channels the risk capital of speculators to a single location, facilitating the trading process.
What is the 'first notice day'?
The first day in the delivery month on which delivery of the cash commodity may be made.
What distinguishes floor traders from designated market makers?
Floor traders trade for their own accounts without the responsibility to maintain an orderly market, while designated market makers must buy or sell stocks to ensure market order.
What is the role of clearinghouses in futures trading?
To collect margin and eliminate counter-party risk.
What happens when the delivery month arrives?
The clearing house directs a short to deliver the cash commodity to a long.
What is involved in the process of clearing futures contracts?
It includes final settlement, assignment, and delivery.
What is the primary objective of hedgers in the futures market?
To limit the risk associated with cash price movements.
When can delivery of the cash commodity be made?
Only during the delivery month.
How are futures contracts negotiated?
On an exchange, where all purchase and sale orders are channeled through brokers.
What is the primary objective of speculators in the futures market?
To make a profit by buying and selling futures contracts.
What actions do speculators take when they anticipate price changes?
They take a long position (buy) when they expect prices to rise and a short position (sell) when they expect prices to fall.
What happens when a speculator accepts delivery?
They must pay for the full value of the cash commodity or arrange for financing.
What is a commodity futures contract?
An agreement between a buyer and a seller on the floor of an exchange for the delivery of a cash commodity at a specified price.
What characterizes a successful futures market?
A large number of participants leading to efficient trading with small variations between bids and offers.
What is the purpose of margin requirements imposed by the clearing house?
To ensure the financial integrity and capability of the clearing house.
What occurs during a futures transaction?
A broker representing the buyer transacts an order with a broker representing the seller.
What happens if the price of a futures contract moves favorably for a member firm?
The member firm will receive a check for the amount in excess of the original margin requirement.
What is a 'stopped' delivery notice?
A buyer assigned a delivery notice must accept delivery.
What is required for an offsetting transaction to be made in futures trading?
It must be done before the last trading day during the delivery month.
From where can delivery be made?
Only from a warehouse or depository that’s regular for delivery, approved by the exchange.
What must happen before the commodity is delivered?
It must be inspected to ensure it meets the exchange’s standards.
Who determines the specific day and location for delivery?
The seller determines the specific day and location.
What is the role of the clearing house in the offsetting process?
It provides a buyer for a short who wants to make delivery or a seller for a long who wants to accept delivery.
Why is it important for commodities to be easily graded and standardized in a futures market?
To ensure buyer confidence in the commodities being delivered on futures contracts.
What are the membership requirements for the clearing house?
Membership requirements are stringent, focusing on integrity and financial capability.
How does the Chicago Board of Trade determine which clearing member receives the delivery notice?
It sends the notice to the clearing member with the oldest long position.
What does it mean to offset a position in futures trading?
To eliminate the obligation by entering into an equivalent transaction.
In a futures contract transaction, do the buyer and seller know each other's identities?
No, neither party knows nor cares about the identity of the other.
How do speculators contribute to market liquidity?
By actively entering bids and offers for commodities.
What is the exception for currency trades regarding delivery?
The buyer determines the location from which settlement will be made.
