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Whether you are new to the agricultural commodities industry or a seasoned trader, it is important to have a solid understanding of the markets to assist you and your trading strategies. From its unique specifications to its key fundamentals, learn how this important sector came to be.
Founded in 1898 as a not-for-profit corporation, in November 2000 CME became the first U.S. financial exchange to demutualize and become a shareholder-owned corporation.
CME has four major product areas: interest rates, stock indexes, foreign exchange and commodities. In 2000, more than 231 million contracts with an underlying value of $155 trillion changed hands at CME, representing the largest notional value traded on any futures exchange in the world.
Why are there new contracts?
Whenever a commodity is actively bought and sold in the cash market and there are enough people who could benefit from having a futures contract for that commodity, an exchange can decide to introduce a new futures contract.
Agricultural Commodity Futures
The first commodities traded at CME were agricultural products. Modern expansion of CME started in 1961 when Frozen Pork Bellies were introduced (an extremely innovative idea at the time), soon to be followed by Live Cattle and Live Hog futures, the first futures contracts on live animals. Today, there are also futures contracts for Feeder Cattle and Lean Hogs. The latest agricultural futures include contracts for Milk, Butter and Whey. Forest-related products currently include Oriented Strand Board and Random Length Lumber.
Foreign Exchange Futures
A number of foreign exchange futures are traded at CME. Currency futures are quoted as U.S. dollars against the currency. That tells you the number of dollars it takes to buy one unit of foreign currency. For example, dollars per Japanese yen, or dollars per British pound. There are also futures on the Euro FX (the pan-European currency), Australian dollar, Canadian dollar, French franc and Swiss franc. The latest foreign exchange futures added to CME are those from emerging nations such as the Mexican peso, Brazilian real, Russian ruble and South African rand.
How big are these contracts?
Here’s an example. One Euro FX futures contract is the equivalent of 125,000 Euro. A quote of .9200 means it costs 92 U.S. cents to buy one Euro. The total value of the contract would be 125,000 x .92 = 115,000
Interest Rate Futures
CME trades interest rate products like 13-week and one-year U.S. Treasury Bills. People can profit from trading interest rate futures by correctly predicting upward or downward interest rate changes.
CME also trades Eurodollars, which are U.S. dollars on deposit with banks outside the country. The futures contract reflects the offered interest rate for a 3-month $1 million deposit.
The #1 Traded Contract
CME’s Eurodollar contract tops the charts. In 1999, there were over 93 million Eurodollar contracts traded.
Other interest rate products include the Brady Bonds (Mexican Par, Argentine FRB, Brazilian C, and Brazilian EI Bonds), Federal Funds Rate, and LIBOR futures. LIBOR stands for London Interbank Offered Rate, an interest rate dealing in Eurodollars between commercial banks in the London Interbank Market. CME’s LIBOR contract is for a one-month $3 million deposit.
The fourth group of contracts traded at CME is the index group, and it includes futures and options on stock indexes as well as a major commodity index. In recent years, stock index futures have become very popular, highly traded contracts. In 1999, for example, the S&P 500 Stock Index futures contract was the second most-traded contract at CME, and the E-mini S&P 500 (the smaller, online version of the standard index contract) ranked third in trading volume. The actual S&P 500 Stock Index tracks the performance of 500 large companies, which represent about 80% of the value of all the stocks listed on the New York Stock Exchange. People invest in stock index contracts to protect stock investments, gain broader exposure to various equity markets, and to try to capitalize on the continuous movement that characterizes these indexes.
S&P 500 Contract Value
The S&P 500 futures contract is valued at 250 times the index price. $1200.00 x 250 = $300,000
As you can see from the great number and variety of contracts traded at CME, a lot has changed since 1898.
Source: Chicago Mercantile Exchange