The Futures Market

 The futures market is rather interesting because a buyer and seller enter into a contract to purchase/sell a commodity such as corn at a specific price on a set date.  The seller is hoping he is able to get more than the going price while the buy is hoping to end up paying less than everyone else.

We see references made in television shows when someone comments about pork bellies futures or corn but the truth is that many business use this technique. For instance, airlines might sign a contract with a fuel company to provide so much fuel at a certain price on a set date.  This way the airlines knows exactly what they will pay while the fuel company has a guaranteed sale.  On the other hand, there are people who participate in futures contracts to make money rather than actually take delivery of the product.

Futures contracts are usually carried out at a exchange-traded market which is the intermediary between the two parties.  Basically the contract has the two people agreeing to a price K that is agreed to today but to be delivered at a later time T.  K refers to the futures or strike price while T is the delivery or maturity time.  The buyer or the one who agrees to purchase the item is said to be long while the seller who sells the item is said to be short.

The way it works is that the buyer contacts a a specialized broker asking for a contract for a certain amount at a certain price such as 6000 bushels of corn to be delivered in September.  The broker passes the order to a trader associated with the Chicago Board of Trade asking for one order for 6000 bushels of corn.  The Chicago Board of Trade is an exchange specializing in the buying and selling of commodities and it was established back in 1848.  Originally, it only traded agricultural items such as corn or soybeans but over time has grown to include gold, silver, Treasury bonds, and energy.

At the same time, someone who has 6000 bushels of corn available, contacts a broker to offer it up for sale.  This broker contacts a trader on the Chicago Board of Trade to sell this and the two traders talk, enter into a contract for price and delivery.  Often times, the person buying the commodity will sell it off later, before they take delivery on it.  Many people use this as a way to increase their value without relying on the stock market.

There are some activities you can do in the classroom to help students understand more about futures markets.  The first one, talks about a commodity challenge before the actual activity.  Ignore the contest because it is from 2014 but the activity is worth doing.  It has students take an unopened bag of M & M's.  The students predict how many of each color are in the bag before they open it.  Based on this prediction, the students then decide how many they want to presell at a certain price before calculating how much they make.

Then they open the bag and sort through, determining how many of each color they actually have and they only write down the number they have for each color they didn't presell.  If they oversold a color, they can't count it so have to use a zero and at the end of this step, they calculate how much they make on the ones they didn't presell.  At the end, they determine how they fared overall.  It has questions for students to answer after they have worked through the activity.    It includes all the instructions and worksheets you need to do it in the class.

The second one has a lovely presentation explaining the history of futures, defines everything about futures, the types of people who are involved in futures, information on going long or short, and just about everything you need to know about the topic.  In addition, there is a note sheet to accompany this presentation for students to fill out as they watch it.  At the end, is a quiz students may take to show what they've learned.

Finally is this manual put out by Chicago Mercantile Exchange for high school teachers of agriculture.  The eight chapter book explains everything step by step and includes mathematical examples of everything so a student can actually understand there is math involved every step of the way. In fact the eighth chapter specifically focuses on the math involved with cash marketing, futures, and options math.  The examples are quite clear and the practice problems are well done.  At the very end, one can find all the answers.

Although this topic is taught in agriculture, it is important to look at from a mathematical point of view because it does involve math.  The practical uses are obvious if you are a farmer but it is also a way of making money in today's world of finances.  Let me know what you think, I'd love to hear.  Have a great day.