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Contract Specs
Exchange Corn Soybean Soy oil Soy meal wheat COCOA Sugar Coffee
CME CME CME CME CME ICE ICE ICE ICE
symbol C S BO SM W CC SB KC
Contract size 5000 Bushels 5000 Bushels 60000 Lbs 100 S.Tons 5000 bushels 10 MT 112000 Lbs 37500 Lbs
pricing unit cents/bushel cents/bushel cents/Lbs $ cents/ S.ton cents/bushel $/MT cents/Lbs cents/Lbs
tick size 1/4 of a cent 1/4 of a cent 1/100 cent 10 cents/S.Ton 1/4 of a cent 1/ MT 1/100 cent 5/100 cents
Daily price limit 0.40-0.60 cents 0.70-1.05-1.60 2.3-3.5-5.5 $20-$30-$45 0.60-0.90 cents NA NA NA
Months available
Jan F F
Feb
Mar H H H H H H H
Aprial
May K K K K K K K
June
July N N N N N N N
August Q Q
September U U U U U U
Octember V V V
November
December Z Z Z Z Z Z

 

Basis Explained


Basis

A basis is a difference between cash-Futures, or in other words : Cash-Futures = basis. A complete cycle of hedge involves the following

  • Cash market price at the inception of the contract
  • Futures  contract price at the inception of the contract
  • Cash market price at maturity
  • Futures price at maturity

The Futures and cash move in tandem to each other but, an inherent cost of carry is what makes the futures a bit more expensive than the cash market price.

Therefore if cash market price today is X, the futures prices consist a carrying cost which makes the it(futures price) X+cost of carry. This cost of carry is the basis that is referred to, at the beginning of the contract.

For example: A farmer enters  into a contract in July to sell soybean in Sep, assume the cash and futures as cash at 360 cents, Sep futures at 375 cents and hence the basis stands at -15 cents(360-375).

The process of hedge:

Since the farmer is a seller of a commodity at a later date, he takes a short hedge that is selling futures for the value of his inventory to protect from price decline.

In July assume cash is at 360 cents and assume farmer sells futures at "then" prevailing price of Sep soybean contract at 375 cents.

So the hedge position is for July Cash reference 360 cents the Farmer is short Sep contract at 375 cents.

Maturity:

When the contract matures say, on sep when the farmer finally has to deliver soybeans against his contracts, the cash market prices “then” would obviously be function of existing cash market demand/supply situation.

In Sep there could be 2 scenarios the farmer can see – a price drop – or a price rise.

If price drops: The farmer has 2 situations again that the

Cash market doesn’t drop the same way as the futures     or
The futures doesn’t drop the same way as the cash market.

On the other had If price rises the same kind of deviations in cash and Futures are possible for the various reasons prevailing in cash market at the time of contract maturity.

To summarize all posible cases a brief description is given below.




Price drop

Cash(a)

Futures(b)

Basis(c)

Futures* Gain/Loss(d)

Selling price(a+d)

360

375

-15

0

360

355

365

-10

10

365

350

355

-5

20

370

345

335

10

40

385

335

315

20

60

395

330

310

20

65

395

More negative reading is a weakening of the basis or that cash market is performing poorly to futures

More positive reading is a strengthening of the basis or that the cash market are performing better to futures market

*Gain from futures is calculated assuming the farmer has sold futures from 375 and the profit from futures is shown at various levels.

 

 




Price rise

Cash(a)

Futures(b)

Basis(c)

Futures* Gain/Loss(d)

Selling price(a+d)

360

375

-15

0

360

370

390

-20

-15

355

375

400

-25

-25

350

380

410

-30

-35

345

400

415

-15

-40

360

415

420

-5

-45

370

430

425

5

-50

380

 

 

More negative reading is a weakening of the basis or that cash market is performing poorly to futures

More positive reading is a strengthening of the basis or that the cash market are performing better than the futures market

*Gain from futures is calculated assuming the farmer has sold futures from 375 and the profit from futures is shown at various levels.

 

 

The Farmer in this case is said to be “Basis Long”.

A widening basis that is a higher cash market price compared to futures will help realize better selling price.
A weakening basis that is cash market performing poorly to futures market dose not benefit a farmer, but benefit a buyer/ intermediary etc.

 

Sale or purchase price Fixation:

Ultimately the Farmer has to make sure to not loose value of the produce and be exposed to a wild price swing. The final price realized would be

Cash Price+gain/Loss from Futures.

 

 

 

 
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