© Paul Koch Futures & Options 4185 Capitol Federal Hall

(785) 864-7503, pkoch@ku.edu The University of Kansas School of Business

Futures Projects
Maximum: 1 page of text for each project, with attachments as needed
Audience: describe effectively to me and my teaching assistant who will help grade these.
 These projects must be done in groups, primarily to encourage discussion. Groups of 2 or 3
are recommended (more than 3 is not allowed, and 1 is ill-advised and requires permission).
Also, you are allowed to change groups over the semester.
 Each project will be graded on whether it meets the assigned requirements.

Futures Project #1

Goal: Thoroughly understand the details of one financial and one commodity futures contract.
 Pick two futures contracts:
o one on a financial underlying asset and one on a real commodity underlying asset;
o make sure they are quoted on markets.wsj.com, under Commodities & Futures
(you will need their quotes for Futures Project #2);
o one of the contracts must expire this coming October;
o the other contract must expire in a month beyond this coming March.
 Describe in your own words the terms of each of these contracts thoroughly and in detail.
(Do NOT just cut and paste tables of contract specifications from the web!)
 Find out how much initial and maintenance margin a broker or the exchange requires to
be posted for each contract. What is the current notional value of one contract? How do
the margins compare to each other and to the current notional value of each contract?
 Describe your plan to take two positions, indicating:
o which contract you plan to buy and which contract you plan to sell, at the closing
price on the day after this assignment is due (one long position and one short
position are required);
o how many contracts you will trade of each.

You can find information on the specifications of many contracts at the following web site:
www.cmegroup.com; Pick a contract (click on the product); Contract Specs.
For example, here is the link listing (but not describing) the detailed terms for CL crude oil.
www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contract_specifications.html
Scroll down this page with specifications and click on "NYMEX Position Limits" to find the rule
book in the form of an excel spreadsheet. Toward the top of this rule book (line 40) you’ll find
the major crude oil futures contract (CL: “Crude Oil Last Day Financial Futures”). This table
shows the position or ‘accountability’ limits, such as the following: 3,000 contracts in the
Expiration Month (i.e., “Initial Spot Month Limit”); 10,000 contracts in any Single Month (i.e.,
“Single Month Accountability Level); and 20,000 contracts across All Months (i.e., “All Month
Accountability Level”). Here ‘accountability’ simply means that if an investor exceeds these
limits, s/he must request an exemption for good reasons.
The point of this project is to learn details about two futures contracts of your choice. I am not
merely assigning you busywork. This exercise will help bring the material in the textbook to life.
I want you to understand and feel what it is like to trade these contracts.
Futures Project #2

Goal: Track the daily performance of each contract you described in Futures Project #1, as well
as the underlying assets and a margin account, for two weeks beginning the day after
Futures Project #1 is due.
 Assume that:
o You initially bought or sold the futures contracts at the closing price on the day
after the due date for Futures Project #1.
o Your account starts with only $1,000 more than is required to post initial margin.
 What was the initial notional value of each position that you took?
 For each position, determine at what price the broker would issue a margin call to you
(assuming that the price of the other futures contract does not change).
 Graph the daily movements in the price of each futures contract and attach printed copies.
o Graphing sites include: BarChart.com, TimingCharts.com, TradingCharts.com,
and CommodityCharts.com (there are others as well).
 Calculate and then list and graph the daily movements in the basis for two weeks
following the date that the futures positions were initiated.
Attach your data sources. Be resourceful:
o For example, CCY00 is the ticker symbol for cash cocoa on BarChart.com
(contract CC for month Y and year 00)
o Spot cash prices are listed daily in the Wall Street Journal or on wsj.com
 Construct, list, and graph the daily balance of a margin account for two weeks following
the date that the futures positions were initiated.
o Assume that the broker does not pay you interest for holding either required or
excess margin.
o Subtract commissions and exchange fees (make realistic assumptions).
o Indicate if and when you would need to transfer cash to fund margin calls (if such
an action is required to maintain your position).
 Briefly observe and summarize the changes over time, DESCRIBING the movements in
the prices of each futures contract, the prices of the underlying assets, the basis for each
position, and the margin account.
Futures Project #3

Goal: For one of your two futures contracts (either the financial or commodity contract that you
previously analyzed in Futures Projects #1 and #2), describe who might use it and how.

 Based on the experience reported in your Future Project #2, provide one example of a
natural hedger and what specific form of risk this person or firm might seek to reduce.
o Do you suspect that this natural hedger is primarily long or short these futures?
Briefly explain why.
o Describe the assumed spot position for this hedger, the futures hedge position
taken (as reported in your Futures Project #2), and the offsetting trade required to
close out the futures hedge position.
o Compare the futures and spot profits. How much was gained or lost on each side?
o Assume that these positions were hedged one-for-one, what is the net gain / loss?
o Do you suspect that the optimal minimum-variance hedge ratio would likely be
more or less than one-for-one in this case? Briefly explain why.
o Do you think this natural hedger would prefer to make or take delivery instead?

 For an arbitrageur, estimate the cost of carry for the futures contract.
o Describe the components of the cost of carry.
o Approximately how much, in percent or dollars, is each component?
o Is there currently a convenience yield between the futures and spot prices? If so,
who is willing to forego this value and why?

 Suppose a speculator rolled the position forward on a particular recent date.

o Describe how, with trades and approximate prices.
o On that date, calculate the basis for each maturity of this contract.
 Has the basis on the old contract changed since the position was initiated?
 How much is the difference in the basis on the old contract and the basis
on the new contract now? Why do they differ?
o Would the speculator have been better or worse off by taking the initial position
and rolling it forward now, or by taking a position in a futures contract with the
longer maturity from the outset?