Contract Specs

	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.