Wheat Futures - The Kansas City Board of Trade, established near one of the world's most fertile growing regions, is the largest free market for hard red winter wheat. Prices negotiated in the KCBT wheat futures trading pit are the benchmark for wheat prices around the world. The role of the KCBT has evolved since the exchange was founded more than years ago as a central market for wheat grown in the Great Plains.

The KCBT has become an international market force, influencing wheat prices in Australia and Argentina as well as Kansas and Oklahoma. The KCBT also became a financial market leader with the introduction of its Value Line stock index futures contract in , and extended its leadership to energy in with the introduction of western natural gas futures and options.

But the exchange has not lost sight of its original purpose: Traders in the KCBT wheat pit typically represent interests that handle and process wheat - producers, exporters, millers and bakers - and whose inventories are subject to price change.

They use futures contracts to minimize the risk of price change, a procedure called "hedging. Speculators also are represented in the KCBT wheat pit. They perform the crucial role in any futures market of assuming risk from hedgers.

These investors neither own nor plan to own commodities, but hope to profit from price changes in the futures contracts they buy and sell.

A futures contract is an agreement between a buyer and a seller to receive or deliver a product on a future date at a price they have negotiated today. The agreement is standardized as to delivery period, contract size and quality of the product. These specifications are determined by the exchange. The only negotiable terms are price and the number of contracts involved in each trade.

Delivery of the product seldom occurs. Futures contracts typically are used as a price protection mechanism or an investment tool, not as a method of selling or obtaining a product. To avoid having to meet his contractual obligation to receive or deliver a product, a buyer or seller must liquidate his futures contract.

A buyer long would sell his contract, and a seller short would buy his contract back. This procedure is called offsetting a position. The ability to deliver is necessary to maintain the economic relationship between the cash and futures markets.

A KCBT wheat futures contract represents 5, bushels of hard red winter wheat. The contract is for wheat graded No. The wheat can be delivered in Kansas City or in Hutchinson, Kansas, in March, May, July, September and December. Hard red winter wheat, grown primarily in the Great Plains, is one of five classes of wheat produced in the U.

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Hard red winter wheat accounts for around 45 percent of total U. The futures price is simply what a buyer is willing to pay and a seller is willing to accept for a product. Traders shout bids and offers until they agree on the price. This method of trading, called "open outcry," is different from stock trading because transactions can occur only in the open forum of the trading pits. The KCBT itself does not set prices. The exchange is merely the place where buyers and sellers of hard red winter wheat meet to conduct business.

Bids and offers are based on the traders' assessments of supply and demand factors as well as technical indications of price relationships. Factors that influence supply and demand for U. The purpose of a hedge is to ensure price protection against adverse market moves.

While a hedge limits the potential for loss, it also limits the potential for further profit. A hedge involves taking a futures position opposite, but equal in size to, a cash position.

The price movement of one position tends to offset the other because futures and cash prices tend to move in the same direction. This means that a loss in value of the cash position will be offset by a gain in the futures position. For example, a mill with an inventory of , bushels, a long cash position, may put on a short hedge in KCBT wheat futures. To put on the hedge, the mill sells 20 futures contracts, the equivalent of , bushels.

Each contract represents 5, bushels; , divided by 5, equals 20 contracts. If prices decline, the mill's profit from the futures hedge offsets the loss in the inventory value.

If prices rise, the mill will lose money on the futures position, but the loss will be offset by the increased value of the inventory. An exporter that sold , bushels to Japan but does not yet own wheat a short cash position may put on a long hedge in KCBT wheat futures. To put on the hedge, the exporter buys 70 futures contracts, the equivalent of , bushels , divided by 5, equals 70 contracts.

If prices increase, the exporter's profit from its futures hedge offsets the higher prices paid to obtain the wheat. If prices decrease, the exporter will lose money on the futures transaction, but gain from the opportunity to purchase cash grain at a lower price. Each exchange has a clearing house, usually operating autonomously, to ensure the financial integrity of each trade. After a transaction has been completed in the trading pit, the clearing house legally assumes the opposite side of each trade, becoming the buyer to every seller and the seller to every buyer.

This allows traders to liquidate their positions without locating the original opposite part to the trade. The clearing house, through its member firms, acts as guarantor of each contract.

This alleviates concerns about the creditworthiness of the party on the opposite side of a trade. No KCBT customer has suffered a financial loss because of default since the KCBT Clearing Corporation was established in Margin is a deposit of earnest money similar to the performance bond required in some business transactions.

The deposit represents an investor's intent to stand good for any financial obligations his futures position incurs. Both buyers and sellers are required to put up margin when opening a futures trading account. This differs from stock trading, where margin is a down payment on a stock purchase. Margin requirements for each account are figured daily.

If the futures position incurs a loss, an additional margin deposit, known as a "margin call," will be required. Gains in the futures position will be added to the margin account.

OPTIONS ON MILLING WHEAT FUTURES | Derivatives

Minimum margins are set by each exchange to protect open accounts. Margin levels are not determined by contract value. Rather, margins reflect price volatility and other risks of holding a futures position. Margins vary according to the type of position hedge or speculative and vary with volatility.

Annual KCBT trading volume - total bushels of wheat that change hands - exceeds typical U. That's because the term "volume" in futures trading refers to the number of times contracts change hands, not the number of bushels actually under contract. Over time, one contract representing 5, bushels of wheat can change hands many times.

For example, Trader A buys one contract, then sells it to Trader B, who then sells it to Trader C. Volume is reported as 15, bushels because one contract for 5, bushels changed hands three times.

But the same 5, bushels were involved in all three transactions. Open interest is the number of contracts that are "open" each day, meaning they have not been offset with an opposite transaction or physical delivery by the end of the trading day. As of this writing, the record high open interest at the KCBT was Wheat Futures Special Report , Grain Futures, Corn Futures, Soybean Futures. There is a substantial risk of loss in trading commodity futures and options. Past performance is not indicative of future results.

A movement in the cash market would not necessarily move in tandem with the related futures and options contract being offered. Commodity Brokerage Specializing in Online Futures and Options Trading. Call to begin trading today - International Investors call Currencies Futures Energy Futures Financial Futures Grain Futures Indice Futures Meat Futures Metal Futures Soft Futures.

WHO USES KCBT WHEAT FUTURES? WHAT IS A FUTURES CONTRACT? WHAT IS A KCBT WHEAT FUTURES CONTRACT? WHAT IS HARD RED WINTER WHEAT?

Wheat Futures And Options Market

Other types of wheat and their uses: Soft red winter, around 20 percent of U. WHAT FACTORS AFFECT SUPPLY AND DEMAND? HOW ARE KCBT WHEAT FUTURES USED? Wheat futures can be used for a variety of price protection and investment strategies.

Ensuring a selling price for wheat that has not been harvested or for wheat inventories. Locking in a purchase price for wheat that will be needed in the future.

Profiting from a discrepancy in the usual price relationships between hard red winter wheat and another commodity, between two delivery months of the hard red winter wheat futures contract, or between hard red and another type of wheat. Participating in economic trends such as an improvement in commodity prices versus stock prices.

Protecting uncovered KCBT wheat options positions. WHAT IS THE PURPOSE OF HEDGING? Hedging merely reduces the risk of price fluctuations that can affect the value of a commodity. HOW DOES HEDGING WORK? Hedging examples can be found later in this brochure. WHAT IS THE CLEARING HOUSE? Margin deposits are credited to the ultimate profit or loss of a position. Brokerage houses may require margins higher than the exchange minimum.

Another figure measures the amount of wheat actually under contract - open interest. Wheat Futures Contract Specifications Kansas City Board of Trade COMMODITY: CME Globex trading from 7: CT Monday to Friday: Break in CME Globex trading from 7: Floor and CME Globex trading from 8: CT Mini-sized Grains trades til 1: July, September, December, March, May Price Quotation: Combined with wheat options for a net long or net short futures - equivalent maximum of: Physical; registered warehouse receipt issued by regular elevators Deliverable Grades: Must be issued and delivered to the KCBT Clearing Corp.

There is no trading during the last seven 7 business days of the liquidating month First Notice Day: The business day preceding the first business day of the liquidating month First Delivery Day: The first business day of the liquidating month Last Notice Day: Hard Red Winter Wheat Options Trading Began Oct.

One KCBT hard red winter wheat futures contract Ticker Symbol: Serial Strike Price Intervals: Integral multiples of 10 cents per bushel Listing of Strikes: New strikes are listed to maintain 30 above and 30 below the at-the-money strike in increments of 10 cents Price Quotation: Any time prior to expiration by giving notice to the KCBT Clearing Corp.

Substitutions at differentials established by the exchange Tick Size: Jul, Sep, Dec, Mar, May Last Trading Day: The business day prior to the 15th calendar day of the contract month Last Delivery Day: Last business day of the delivery month.

For contracts with delivery in March and subsequent months: Seventh business days following the last trading day of the delivery month Trading Hours: ZW Daily Price Limit: At the commencement of trading, list 5 strikes above and 5 strikes below the at-the-money strike Contract Months: Jul, Sep, Dec, Mar, May; a monthly serial option contract is listed when the front month is not a standard option contract.

The monthly option contract exercises into the nearby futures contract. For example, an August option exercises into a September futures position Last Trading Day: For standard option contracts: The last Friday preceding the first notice day of the corresponding wheat futures contract month by at least two business days. For serial option contracts: The last Friday which precedes by at least two business days the last business day of the month preceding the option month Exercise: The buyer of a futures option may exercise the option on any business day prior to expiration by giving notice to the Board of Trade Clearing Corporation by 6: Option exercise results in an underlying futures market position.

Options in-the-money on the last day of trading are automatically exercised Expiration: Unexercised options expire at Chicago time on the first Saturday following the last day of trading Trading Hours: OZW Daily Price Limit: Limits are lifted on the last trading day See Also: All Rights Reserved Programming by Steelesoft Consulting.

New strikes are listed to maintain 30 above and 30 below the at-the-money strike in increments of 10 cents. Substitutions at differentials established by the exchange.

Seventh business days following the last trading day of the delivery month. No limit in the spot month limits are lifted two business days before the spot month begins. At the commencement of trading, list 5 strikes above and 5 strikes below the at-the-money strike.

For example, an August option exercises into a September futures position. The last Friday which precedes by at least two business days the last business day of the month preceding the option month.

Options in-the-money on the last day of trading are automatically exercised. Chicago time on the first Saturday following the last day of trading. Limits are lifted on the last trading day.