agricultural index futures and options at the minneapolis grain … indexes all.pdf · cash corn...

The information contained in this publication is not meant to be construed as trading recommendations or advice of the Minneapolis Grain Exchange. Please consult the Rules and Regulations of the Minneapolis Grain Exchange for complete contract information and specifications. The Minneapolis Grain Exchange is not responsible for any errors or omissions.

• INDEX—Agricultural Index Advantages and Specifications

• DEFINITION—Financial Settlement

• INDEX—Agricultural Index Basis Hedging, Trading and Examples

• INDEX—Agricultural Index Options Advantages, Specifications and Examples

Agricultural Index Futures and Options at the Minneapolis Grain Exchange


INDEX-Agricultural Index Advantages and Specifications• Advantages of Agricultural Index Futures• Advantages of Agricultural Index Futures (con’t)• Contracts traded• Index Futures Contract Specifications• Quote Vendor Retrieval Codes• Agricultural Spot Indexes

• Data Transmission Network (DTN)• Spot Index Reporting• Spot Index Calculation• Spot Bids, Underlying Commodities• Spot Bid Maps, by State

Agricultural Index Futures and Options at the Minneapolis Grain Exchange

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Financial/cash settlement, no deliveries. When index futures and options expire, they settle to a financial value, eliminating deliveries. As a result, there are no delivery specifications, storage costs, grade differentials or load-out costs.

Index based, country-origin pricing. DTN collects elevator bids daily, and in turn, calculates the spot indexes upon which MGEX agricultural index futures are settled. DTN gathers bids from a majority of U.S. elevators, and the indexes are an average of the prices in the country. The result: More accurate hedges, the opportunity to hedge basis and a market that tracks country cash values for commodities, not just a particular location.

All calendar months traded. All months are listed so traders can more accurately hedge their needs and pay option premiums for only the months needed.

Advantages of Index Futures

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Hedging. MGEX index futures and options more closely track country prices because local basis is, in part, included in the index futures contract settlement price. For hedgers, this means their futures position will better reflect their cash position and provide a more accurate hedge. When paired with the fact that all months are traded, MGEX index contracts make a lot of sense in any hedging program.

Electronic trading. MGEX agricultural index futures trade on an electronic platform that offers market transparency, instant execution and extended trading hours.

Interclass wheat spreads marked-to-market, on a single platform. MGEX lists cash-settled futures on 3 classes of wheat—hard red spring, hard red winter and soft red winter—all on the e-cbot powered by LIFFE CONNECT platform. This gives the trader execution speed and efficiency in addition to marked-to-market margining.

Advantages of Index Futures (con’t)

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MGEX electronically trades five cash-settled, agricultural futures and options contracts. The contracts are:

• National Corn Index (NCI)• National Soybean Index (NSI)• Hard Red Spring Wheat Index (HRSI)• Hard Red Winter Wheat Index (HRWI)• Soft Red Winter Wheat Index (SRWI)

The contracts trade on the e-cbot® powered by LIFFE CONNECT®platform.

Additionally, MGEX’s deliverable hard red spring wheat contracts are traded electronically overnight on the platform.

Agricultural Index Futures and Options—Contracts Traded

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Index Futures Contract Specifications

HRSI=IP; HRWI=IH; SRWI=IW

ISICTicker Symbol

In cash, to simple average of DTN spot HRSI, HRWI or SRWI for last three trading days of settlement month

In cash, to simple average of DTN spot NSI for last three trading days of settlement

month

In cash, to simple average of DTN spot NCI for last three trading days

of settlement month

Settlement

Business day following Last Trading Day



Settlement Date

Last business day of settlement month



Last Trading Day

$0.30 cents per bushel$0.60 cents per bushel$0.25 cents per bushelDaily Price Limit

¼ cent per bushel ($0.0025) or $12.50 per contract



Tick Size

All twelveAll twelveAll twelveContract Months

5,000 bushels5,000 bushels5,000 bushelsContract Unit

7:32 pm-1:45 pm Sun-Fri7:31 pm-1:45 pm Sun-Fri7:30 pm-1:45 pm Sun-FriTrading HoursHRSI, HRWI and SRWINSINCI

Consult the "Rules and Regulations” of the Exchange for complete contract specifications or call MGEX at 800-827-4746 or visit www.mgex.com

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Index Futures and Options Retrieval Codes

SRIHWSWINSINCIFuturesFutureSource

@IW@IH@IP@IS@ICOptions

MSIMRIMWIXMSXMCFuturesCQG

MSIMRIMWIXMSXMCOptions

SRIHWSWINSINCIOptions

DTN and Prophet XVENDOR

@IP

HRSI@IH

HRWI@IW@IS@ICFutures

SRWINSINCI

For assistance retrieving MGEX Index quotes, contact your quote vendor.

You may also find quotes and charts for MGEX Agricultural Index Futures and Options at: http://www.mgex.com/quotes_charts.html

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http://www.mgex.com/quotes_charts.html

Spot Agricultural Indexes

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INDEX• Data Transmission Network (DTN)• Spot Index Reporting• Spot Index Calculation• Spot Bids, Underlying Commodities• Spot Bid Maps, by State

MGEX has a licensing agreement with DTN, a leading business-to-business provider of business information services, which enables them to cash settle futures and options to cash commodity indexes calculated by DTN.

After the market close each day, DTN polls approximately 2,000 elevators to arrive at spot indexes for a variety of commodities.

Data Transmission Network

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DTN has been collecting data that comprise the spot indexes for several years. Elevator bids are collected by DTN beginning at approximately 2:00 p.m. (central time) each day and the spot indexes are posted by approximately 5:00 p.m. each day. You canfind the daily index, and the number of indexes included in thatday’s average, at www.mgex.com or on a DTN or ProphetX data terminal.

You may download historical data for the DTN indexes by visiting: http://www.mgex.com/history/historical_new.cfm

The DTN spot indexes are simple averages of the price data included, i.e., one elevator equal one vote.

DTN Spot Index Reporting

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http://www.mgex.com

http://www.mgex.com/history/historical_new.cfm

• Simple average of country elevator bids for commodities.• Index futures are settled to a three-day average of the spot DTN

Index for the last three trading days of the month.• Market participants may trade in and out of their futures and options

positions at any time; however, open positions held through contract expiration will have a final settlement to the three-day average of the spot DTN Index.

• Positions are “marked-to-market” after the close on the last day of trade, and positions are settled in cash the following business day.

• Spot indexes and number of elevators included in the average areposted each day at: www.mgex.com.

Spot Index Calculations

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http://www.mgex.com

Spot Bids, Underlying Commodity

U.S. #1 hard red spring wheat

HRSI

U.S. #1 hard red winter wheat

HRWI

U.S. #2 soft red winter wheat

U.S. #1 yellow soybeans

U.S. #2 yellow corn

SRWINSINCI

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NCI Bid Map, By State, Typical Day

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NSI Bid Map, By State, Typical Day

1

13

3

2

9

281

34499

174 13

29

183

4

79

1

183

1

62

133

1

5

1

64

4

4

2

38

Total =1,732

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HRSI Bid Map, By State, Typical Day

1

377

9

1

74

152

16

Total = 233

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HRWI Bid Map, By State, Typical Day

Total = 457

1

189

2

1

1

139

2

7

9

8

45

14

2

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SRWI Bid Map, By State, Typical Day

1

12

6

8032

10 7

26

2

48

1

2

1334

4

1

13

Total = 382

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Financial settlement, sometimes referred to as cash settlement, simply means there is no delivery alternative for a futures contract. This method of offset is used in financial futures, feeder cattle futures and lean hog futures, to name a few.

Convergence of financially settled futures contracts to the underlying cash market is assured because the final futures offset price is an average of the underlying spot cash index for the last three trading days of the month.

Advantages of cash settlement are:• No delivery worries• Futures and options expire on the same day• DTN spot indexes are reflecting country origin, elevator pricing

for commodities, making them more reflective of values being traded by producers, elevators and end-users

Financial Settlement Definition

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Basis Hedging/TradingINDEX-Agricultural Index Basis Hedging, Trading and

Examples• Basis Hedging/Trading Strategy• NCI minus CBOT Corn Futures• N. Central Iowa Corn Basis• HRSI minus MGEX Spring Wheat Futures• Minneapolis Hard Red Spring Wheat Basis• HRWI minus KCBT Hard Red Winter Wheat Futures• W. Kansas Hard Red Winter Wheat Basis• SRWI minus CBOT Wheat Futures• St. Louis Soft Red Winter Wheat Basis• Example: Basis Hedge, Elevator Long HRS Wheat Basis• Example: Basis Hedge, Mill Needs HRS Wheat• Example: Basis Hedge, Corn End User


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Basis Hedging/Trading Strategy

Keep in mind when examining MGEX agricultural index spreads versus their deliverable counterpart:

Index futures are the “cash” side of the basis spread

• Synthetic long basis position:• “Long” MGEX index futures• “Short” deliverable futures

• Synthetic short basis position:• “Short” MGEX index futures• “Long” deliverable futures

• Visit http://www.mgex.com/charts.html?page=mspreads to chart up-to-date Index versus Deliverable futures spreads.

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http://www.mgex.com/charts.html?page=mspreads

NCI minus CBOT Nearby Corn Futures

This green line represents the difference between the spot NCI and north central Iowa cash corn prices; the black line is north central Iowa cash minus nearby CBOT corn futures. North central Iowa corn basis volatility (standard deviation) versus NCI is 3.4cents per bushel, compared to 7.0 cents per bushel versus CBOT nearby futures.

N. Central Iowa Corn Basis

-60

-50

-40

-30

-20

-10

0

10

20

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05

cent

s pe

r bus

hel

versus CBOT Nearby versus NCI

Standard deviation of basis versus CBOT Nearby: 7.0 cents per bushelStandard deviation of basis versus NCI: 3.4 cents per bushel*Month-end prices through April 2005

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N. Central Iowa Corn Basis

Can you hedge basis? This chart suggests you can, by spreading NCI futures against CBOT futures. The black line above represents the north central Iowa cash corn price minus CBOT nearby futures. The blue line represents the NCI spot index minus CBOT nearby corn futures.

NCI-CBOT versus N. Central Iowa Cash - CBOT

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-30.00

-20.00

-10.00

0.00

1/31/2000 1/31/2001 1/31/2002 1/31/2003 1/31/2004 1/31/2005

cent

s pe

r bus

hel

NCI - CBOT Nearby NC IA Cash - CBOT Nearby

Correlation between NCI/CBOT spread and NC Iowa/CBOT: 91%*Month-end prices through April 2005

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HRSI minus MGEX Nearby Spring Wheat Futures

This green line represents the difference between the spot HRSI and Minneapolis cash spring wheat prices; the black line is Minneapolis cash minus nearby MGEX spring wheat futures (MW). Minneapolis basis volatility (standard deviation) versus HRSI is 17.6 cents per bushel, compared to 28.6 cents per bushel versus MGEX (MW) nearby futures.

Standard deviation of basis versus MW Nearby: 28.6 cents per bushelStandard deviation of basis versus HRSI: 17.6 cents per bushel*Month-end prices through April 2005

Minneapolis Spring Wheat Basis

020406080

100120140160180


cent

s pe

r bus

hel

versus MW Nearby versus HRSI

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Minneapolis Hard Red Spring Wheat Basis

Can you hedge basis? This chart suggests you can, by spreading HRSI futures against MGEX spring wheat futures (MW). The black line above represents the Minneapolis cash spring wheat price minus MW nearby futures. The blue line represents the HRSI spot index minus MGEX nearby futures (MW).

HRSI-MW versus Mpls 14s Cash - MW

-100.00

-50.00

0.00

50.00

100.00

150.00

200.00


cent

s pe

r bus

hel

HRSI - MW Nearby Mpls 14s Cash - MW Nearby

Correlation between HRSI/MW spread and Mpls 14s/MW: 84%*Month-end prices through April 2005

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HRWI minus KCBT Nearby Hard Winter Wheat Futures

This green line represents the difference between the spot HRWI and western Kansas cash hard wheat prices; the black line is western Kansas cash minus nearby KCBT hard wheat futures (KW). Western Kansas basis volatility (standard deviation) versus HRWI is 3.72 cents per bushel, compared to 11.99 cents per bushel versus KCBT (KW) nearby futures.

Western Kansas Hard Red Winter Wheat Basis

-70

-60

-50

-40

-30

-20

-10

0

10


cent

s pe

r bus

hel

versus KCBT Nearby versus HRWI

Standard deviation of basis versus KCBT Nearby: 11.9 cents per bushelStandard deviation of basis versus HRWI: 3.72 cents per bushel*Month-end prices through April 2005

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W. Kansas Hard Red Winter Wheat Basis

Can you hedge basis? This chart suggests you can, by spreading HRWI futures against KCBT hard wheat futures (KW). The black line above represents the western Kansas hard wheat price minus KW nearby futures. The blue line represents the HRWI spot index minus KCBT nearby futures (KW).

HRWI-KW versus W. KS Cash - KCBT

-70.00-60.00-50.00-40.00-30.00-20.00-10.00

0.0010.00


cent

s pe

r bus

hel

HRWI - KCBT Nearby W. KS Cash - KCBT Nearby

Correlation between HRWI/KCBT spread and W. KS/KCBT: 97%*Month-end prices through April 2005

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SRWI minus CBOT Nearby Hard Winter Wheat Futures

This green line represents the difference between the spot SRWI and St. Louis cash soft wheat prices; the black line is St. Louis cash minus nearby CBOT soft wheat futures (W). St. Louis basis volatility (standard deviation) versus SRWI is 11.4 cents per bushel, compared to 22.4 cents per bushel versus CBOT (W) nearby futures.

St. Louis Soft Red Winter Wheat Basis

-60

-40

-20

0

20

40

60

80


cent

s pe

r bus

hel

versus CBOT Nearby versus SRWI

Standard deviation of basis versus CBOT Nearby: 22.4 cents per bushelStandard deviation of basis versus SRWI: 11.4 cents per bushel*Month-end prices through April 2005

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St. Louis Soft Red Winter Wheat Basis

Can you hedge basis? This chart suggests you can, by spreading SRWI futures against CBOT soft wheat futures (W). The black line above represents the St. Louis soft wheat price minus W nearby futures. The blue line represents the SRWI spot index minus CBOT nearby futures (W).

SRWI-CBOT versus St. Louis Cash - CBOT

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-20.00

0.00

20.00

40.00

60.00


cent

s pe

r bus

hel

SRWI - CBOT Nearby STL Cash - CBOT Nearby

Correlation between SRWI/CBOT spread and STL/CBOT: 90%*Month-end prices through April 2005

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Example: Elevator Long Hard Red Spring Wheat—Basis Hedge

Buy HRSI; sell MW; sell cash

Sell HRSI; buy MW

Action taken

Elevator is long basis and expects it to weaken

Result: Elevator was able to hedge nearly 80% of the weakening in basis

404.00

441.00

14% pro HRS cash

11.00

-30.00

-19.00

SpreadHRSI-MW

+46.00358.00328.007/27/04

-14.00Change in basis:Profit on spread:

+60.00381.00362.006/30/04

Basis 14%-MWMWHRSIDate

Note: Spot index used as proxy for nearby index futures futures; all numbers are actual and rounded for simplicity.

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Example: Mill Needs Hard Red Spring Wheat

Sell HRSI; buy MW; buy cash

Buy HRSI; sell MW

Action taken

Elevator is short basis and expects it to strengthen

Result: Mill profited 10 cents on spread as basis rallied 8 cents.

463.00

478.00

14% pro HRS Cash

10.00

-27.00

-37.00

SpreadHRSI-MW

+46.00417.00390.004/30/04

+8.00Change in basis:Profit on spread:

+38.00440.00403.002/27/04

Basis 14%-MWMWHRSIDate


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Example: Corn End User

Buy Iowa cash; sell NCI, buy

CBOT

Buy NCI; sell CBOT

corn

Action taken

Corn End User Wants to Protect Against Basis Rally

Result: End user hedged 6.0 cents of 6.5 cent basis rally

272.50

217.50

NC Iowa Cash Corn

+6.00

-14.50

-20.50

SpreadNCI-CBOT

-23.75296.25281.867/27/04

+6.50Change in basis:Profit on spread:

-30.25247.75227.6110/30/03

Basis Iowa-CBOTCBOTNCIDate


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Options on index futures have some distinct differences that result in operational and price advantages over options on delivery settled futures.

Agricultural Index Options

INDEX-Agricultural Index Options Advantages, Specifications and Examples

• Advantages of Agricultural Index Options• Advantages of Agricultural Index Options (con’t)• Index Options Versus Delivery Options—Price Comparisons• Index Options Contract Specifications• Options Advantage: Hard Red Winter Wheat• Options Advantage: Corn

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Operational Advantages• Options on index futures expire simultaneously with futures at the end of

each settlement month, and• Index options have a monthly expiration cycle versus an irregular cycle, as

is the cash for most delivery-based options. This means:• Users can avoid purchasing unneeded time value• Hedges are more accurate as options expire closer to cash transaction

dates and more closely match their cash transactions.

Advantages of Agricultural Index Options

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Price AdvantagesMGEX index futures reflect country (elevator) prices for commodities, while

most delivery-settled futures represent terminal market pricing. Therefore, delivery settled contracts include a country-to-terminal basis component that largely reflects transportation costs. Consider the following equations:

CBOT Corn Price (Illinois River Price) = Country Price + FreightVersus

NCI Price = Country PriceTherefore

CBOT Corn Price > NCI PriceTherefore, options on delivery-settled futures implicitly include a premium on the

transportation cost. Holding all other factors equal, options on delivery-settled futures will cost more than comparable index options.

For more detail on Agricultural Index Options go to:http://www.mgex.com/documents/OptionsAdvantage.pdf

Advantages of Agricultural Index Options (con’t)

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http://www.mgex.com/documents/OptionsAdvantage.pdf

Index Options versus Delivery Options--Price Comparison

1.181.531.331.481.04

Average Theoretical Premium Savings over 5-years* All option prices are at-the-money calculated using Black’s model with a time-to-maturity of 0.25 years, a 6% interest rate and 25% volatility.

15.8414.4525.7013.209.88Index-based Options Price*

322.70294.30523.40268.80201.30Index-based Futures Price

17.0215.9827.0214.6710.92Delivery-based Options Price*

346.70325.30550.40298.90222.40Delivery-based Futures Price

MGEX Wheat vs. HRSI

KCBT Wheat vs. HRWI

CBOT Beans vs. NSI

CBOT Wheat vs. SRWI

CBOT Corn vs. NCI

Average Futures/Index and Theoretical Options Prices 1999-2004, (all prices in cents per bushel)

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Index Options Contract Specifications

HRSI-OIP; HRWI=OIH; SRWI=OIW

OISOICTicker Symbol

Based on index futures cash settlement, Clearing House

automatically exercises all in-the-money options unless notice to cancel automatic exercise is

given


automatically exercises all in-the-money options unless notice to cancel automatic

exercise is given


automatically exercises all in-the-money options unless notice to cancel automatic

exercise is given

Automatic Exercise

AmericanAmericanAmericanExercise Style




Last Trading Day

1/8 cent per bushel ($0.00125) or $6.25 per contract



Tick Size

All twelveAll twelveAll twelveContract Months

One MGEX index futures contract



Underlying Asset

7:34 pm-1:45 pm Sun-Fri7:33 pm-1:45 pm Sun-Fri7:32 pm-1:45 pm Sun-FriTrading HoursHRSI, HRWI and SRWINSINCI

Consult the "Rules and Regulations” of the Exchange for complete contract specifications or call MGEX at 800-827-4746 or visit www.mgex.com

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Example: Options Advantage—Hard Red Winter Wheat

Both Options Expire

Worthless

Sell KCBT 410 call; Buy

HRWI 390 Call

Action taken

Result: Trader made 5 cents per bushel as both options expired worthless.

0.00

+23.50

KCBT Premium

0.00

-18.50

HRWI Premium

384.25362.412/28/04

415.00385.0012/03/03

KCBT FuturesHRWIDate


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Example: Options Advantage—Corn

Sell NCI 290 Put Option

Buy NCI 290 Put Option

Action taken

Result: Trader realized net gain of 90.5 cents on NCI 290 put; 7.25 cents more than CBOT corn option. Both strikes were approximately 10 cents out-of-the money at time of purchase.

104.00

20.75

CBOT 310 Put Option Premium (CBOT futures at

320.00 cents)

109.009/29/04

18.503/31/04

NCI 290 Put Option Premium (NCI at

299.00 cents)Date


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More Information

Teri HuffakerMinneapolis Grain Exchange400 S. 4th Street, Suite 130Minneapolis, MN [email protected]


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http://www.mgex.com

agricultural index futures and options at the minneapolis grain … indexes all.pdf · cash corn...

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