Dr. Michael Seipel
3082 Magruder Hall
785-4316 (Office)
mseipel@truman.edu
COURSE OVERVIEW
This course examines the history, mechanics, and economic functions of futures and options markets, focusing on their use as risk management tools. Both fundamental and technical analysis are used to examine price behavior in agricultural futures markets.
PREREQUISITES
AGSC 102 (Introduction to Agricultural Business), ECON 130, or ECON 201 (Microeconomics)
COURSE OBJECTIVES
- To introduce to students the history and organization of agricultural futures markets, and the economic principles underlying their operation.
- To acquaint students with the use of both fundamental and technical analysis as means of interpreting and predicting price movements in futures markets.
- To illustrate the practical usage of futures and options as hedging and risk management tools for the producer and agribusiness firm.
- To help students develop a better understanding of the forces affecting agricultural commodity prices by having them follow, analyze, and interpret the price fluctuations in a particular agricultural commodity over the course of a semester.
Wayne D. Purcell and Stephen R. Koontz. 1999. Agricultural Futures and Options: Principles and Strategies, Second Edition. Upper Saddle River, NJ: Prentice Hall.
This text will also be supplemented with materials from the Chicago Board of Trade and a variety of web sites, linked from the course web site. Reading assignments by day are given under the course outline. This schedule represents approximately the pace at which we should move through this material, but is subject to modification as the semester proceeds. Readings assigned for a particular day should be done before class that day, because this is the material that will be discussed in class that day.
COURSE OUTLINE
Week | Topic | Readings | Due |
1 | Introduction to the Course Commodities and Exchanges | Chapter 1 | |
2 | Online Resources Futures Basics | Chapter 1 | Commodity Selections |
3 | Technical Analysis | Chapter 4 | |
4 | Technical Analysis | Chapter 4, 5 | Begin Trade Game |
5 | Technical Analysis | Chapter 5 | Exam 1 |
6 | Cash, Futures, and Basis | Chapter 2 | |
7 | Supply and Demand Basics | Chapter 3 | |
8 | Crop Fundamentals | Chapter 3 | Paper 1 |
9 | Livestock Fundamentals | Chapter 3 | |
10 | Fundamental Analysis Concluded | Chapter 3 | Exam 2 |
11 | Options Basics | Chapter 7 | |
12 | Options Strategies | Chapter 7 | Trade Game Write-up |
13 | Options-Cash-Futures | Chapter 7 | |
14 | Options Concluded | Chapter 7 | Exam 3 HedgeSim |
15 | Combined Risk-Management Strategies | Chapter 11, 12 | HedgeSim Write-up |
16 | Commodity Notebook and Final Paper Final Exam |
COURSEINFO WEB SITE
Because we will use the Internet extensively to find current prices, bar charts, and market analyses for agricultural commodities, I have put together a course web site using the CourseInfo software. This web site will contain links to relevant web sites, important announcements and assignment information, and will allow you to submit assignments electronically. To reach the course web site, go to http://cinfo.truman.edu and scroll down to the AGSC 340 link. Click on this link and, when prompted, enter your Truman e-mail I.D. (i.e. a111) as your logon I.D. and you Social Security Number (with no dashes) as your password. You can change your password after you are logged onto the system.
COURSE FORMAT AND BASIS FOR STUDENT EVALUATION
Possible points for the course are as follows:
| Item | Points Possible | Pct. Of Final Grade |
| In-class Exams (3) | 300 | 37.5% |
| Final Exam | 100 | 12.5% |
| Commodity Notebook | 100 | 12.5% |
| Supply and Usage Paper for Commodity Notebook | 50 | 6.25% |
| Final Paper on Commodity Notebook | 100 | 12.5% |
| Futures/Options/Hedging Exercises (3) | 30 | 3.75% |
| Trading Game and Write-up | 50 | 6.25% |
| HedgeSim Exercises and Write-up (2) | 50 | 6.25% |
| Discussion and Class Participation | 20 | 2.5% |
All deadlines and examination dates must be met unless you make prior arrangements with the instructor and have a valid excuse from the Dean of Students. Material covered during class discussion periods is integral to the content of the course. Therefore, attendance at and participation in class sessions is expected and required, and will affect your grade through discussion and participation points. Final grades will be calculated on a straight scale (A= 90%+, B=80-89.9%, C=70-79.9%, D=60-69.9%, F=Below 60%).
COMMODITY NOTEBOOK AND ASSOCIATED PAPERS
Notebook
By the beginning of the second week of the semester, you will select an agricultural commodity that is traded on one of the major futures exchanges. Over the balance of the semester, you will research this commodity and carefully follow its price movements. By immersing yourself in the day-to-day cash and futures price movement of the commodity you will gain a better perspective on the sometimes significant, sometimes trivial, factors which cause commodity prices to fluctuate. You will compile a notebook on the commodity, which will include charts, news and wire-service clippings, and other relevant information dealing with this commodity. For your notebook, you must check the markets for your commodity on a daily basis and update the notebook each day, similar to the way in which you would keep a daily journal. Information that should go into your notebook on a daily basis includes open, high, low, and close prices of the nearby futures contract, cash price(s) at one or more pre-selected significant markets, and market commentary on that day’s price movement published by the exchange or a commodity brokerage. Information that should go into the notebook on a weekly basis includes daily and weekly bar charts of futures price, analyses of price direction in the commodity by professional traders or analysts, and your own thoughts and comments on price direction in the commodity. Information that will go into the notebook on an occasional basis includes USDA production reports and professional analysts’ comments on these reports, as these reports are published (usually monthly or quarterly). I will collect and provide feedback on your notebooks periodically over the course of the semester.
Supply and Usage Paper
Early in the semester you will prepare a paper (4 to 6 pages) on your commodity. The paper will provide a basic overview of the cash commodity being analyzed and the futures contract associated with the commodity. It should describe the specifications of the contract, including quantity, quality, terms of delivery, and so on. It should also provide a detailed summary of relevant information about the physical (cash) commodity. This information would include major producing areas for the commodity in the United States (what states) and the world, current supply and usage information for the commodity (from USDA supply and usage tables), major USDA production and inventory reports dealing with the commodity and when these are issued, comparison of the current futures price to historical price ranges for the commodity, current price trends (over the previous 12 to 18 months), and analysts’ expectations for price direction over the next few months. After this paper is returned to you, it should be included in your notebook and submitted with the notebook at the end of the semester.
Final Commodity Notebook Paper
You will also prepare a final paper (7 to 10 pages) at the conclusion of the semester which documents and explains the reasons behind the price fluctuations noted in the cash and futures prices of that commodity over the course of the observation period. The final paper should be submitted along with your completed notebook.
Trading Game
Students will also participate in a trading game over approximately five weeks during the semester. Each student will begin the trading game with a trading account containing a certain amount of money. Students will submit buy and sell orders for agricultural commodities to the instructor. The instructor will maintain a record of students’ long and short positions, and at the end of the trading game period will provide students with a summary of their trading activity and their gain or loss. At the end of the trading game students will submit a short paper (1 to 2 pages) describing their trading strategies and outcomes, as well as lessons learned in the process. The game and paper are worth a total of 50 points.
HedgeSim Hedging Simulation Game
We will use HedgeSim software to help illustrate how futures and options can be used as a risk management tool in conjunction with production of an actual commodity. This simulator walks you through a several-month period using real historical cash and futures prices for a grain or livestock commodity. As the producer, you have to make buying and selling decisions for your cash, futures, and options position as you go through the game. The simulator keeps track of your trading activity and enables you to print a final report at the end of the simulation that shows the outcome of your decisions. We will demonstrate the software in class and you will then complete at least two simulations using the software—one as a grain producer and one as a livestock producer (although you can practice as many times as you like). You will turn in the printouts from your two simulations and a 2 to 4 page paper describing the actions taken through the course of each simulation, the effectiveness of those actions, and a comparison of the hedging and marketing of storeable grain versus non-storeable livestock commodities.