ACE 428: Commodity Futures and Options Markets
University of Illinois at Urbana-Champaign
Fall 2010
3:30-4:50 pm TR
Professor:
Course Location:
Office:
Office Hours:
Webpage:
Course Website:
Email:
Dr. Mindy L. Mallory
Education Building room 2
319 Mumford Hall
12:30 – 1:30pm TR, or by appointment
http://mindymallory.wordpress.com/
http://mindymallory428.wordpress.com
https://www.compass.illinois.edu
428.ace@gmail.com
Teaching Assistant:
Office:
Andres Trujillo-Barrera
402 Mumford Hall
Required Text:
Understanding Futures Markets. Kolb and Overdahl. (2006). Malden, MA, Blackwell
Publishing.
Other Texts and Resources: All required material will come from the text above, but
the following resources may be used to supplement your knowledge.
1. Fundamentals of Futures and Options Markets. John Hull. 7th ed. (2010).
Boston, MA, Prentice Hall. ISBN: 978-0136103226
This is a standard text for a course in future and options markets. It is
generally a thorough treatment of futures and options market basics; however,
its treatment of the agricultural commodities is sparse. The physical
agricultural products underlying these contracts give them special properties
not found in the financial futures and option contracts. The new edition
released in 2010 is very similar to previous versions, the most notable addition
to the 7th edition being a chapter devoted to securitization and the credit crisis
of 2008.
2. The Theory and Practice of Futures Markets. Leuthold, Junkus, and Cordier.
(1989). Lexington, MA, Lexington Books.
This book is a bit dated – last published in 1989 – but it is a very good and
detailed treatment of the agricultural contracts. I would seek a newer source
ACE 428
M. Mallory
Fall 2011
to learn about financial contracts, but many of the important issues in the
agricultural contracts have not changed. The age of this book means you can
often pick up a copy relatively cheaply. One of its authors is Illinois’
Distinguished Professor Emeritus, Raymond Leuthold.
3. Futures and options. Edwards, F. and C. Ma (1992). McGraw-Hill.
This book also gives a better treatment of the agricultural contracts than does
Hull, and I think its explanation of the important concepts is quite good.
However, it is a bit dated as well.
4. Economics of Futures Trading for Commercial and Personal Profit. Thomas
Hieronymus. (1977). Commodity Research Bureau.
Probably the first text on commodity futures trading, and it is by the
University of Illinois’ own, Thomas Hieronymus. It is still a great treatment
of commodity markets, and best of all, it is available to download for free.
http://www.farmdoc.illinois.edu/irwin/links_archive_book_Hieronymus1977.asp
Objectives: Upon completion of ACE 428 students will have a working knowledge of
commodity futures and options markets. Among other things students will be
able to articulate the markets’ role as an economic allocation mechanism, describe
intuitively and analytically the relationship between a commodity’s cash, forward,
and futures prices, price option contracts according to some popular models, and
implement a risk management strategy that includes hedging on a commodity
exchange
Illinois Compass: We will be using Illinois Compass as a course management tool. We
will mostly just manage grades here. Announcements, lecture notes, and
assignments will usually be distributed on the course website noted above. Please
make sure you log in and are properly registered in the Compass system.
Course Structure: The course adopts a non-traditional delivery method based on the
idea that it is more efficient for students to engage in passive learning on their
own at home, and engage in active learning activities during regular class time
when they have ready access to the professor and the ta. In a traditional class,
students come to class and passively listen to lectures, and then they go home and
do homework and projects on their own. In this course we reverse the timing of
those activities. Students will access video lectures from the course website and
watch them prior to coming to class. Then class-time activities will involve
working through relevant examples, and often when homework is assigned,
students will be allowed to spend class time working through the homework.
ACE 428
M. Mallory
Fall 2011
Since a significant portion of your time will be spent on your own watching
lectures, only the Thursday class meeting is required and the Tuesday class
meeting will be held as a discussion session.
Homework: Periodically homework is assigned to illustrate or expand upon ideas
developed in the lectures. They will come in a variety of formats including short
answer questions, analysis with Microsoft Excel spreadsheets, and sometimes will
be conducted as in class activities. Late or make-up assignments will not be
accepted.
Quizzes: There will be very short pop quizzes at the beginning of class time on one
quarter of the class sessions. These quizzes are intended to provide additional
incentive to watch the videos before coming to Thursday classes. They will
address very basic concepts or definitions that should be trivial if you have
watched the week’s required video, but difficult if you have not. Make up quizzes
will not be offered.
Midterm Exams: There will be two in-class midterm exams. October 4, 2011 and
November 8, 2011. If there is an excusable circumstance which prevents you
from taking an exam at the scheduled time, contact me immediately (usually
requires documentation from the emergency dean). We will work out an alternate
time to take a make-up exam. Failure to attend an exam without making prior
arrangements will result in a score of zero for the exam.
Bring your university identification to all exams; calculators used during exams
are subject to my inspection. If you plan to use a graphing calculator with data
storage capabilities please approve it with me prior to the exam. The use of
laptop computers, cellular phones, or other data transmitting devices during the
exam is prohibited.
Final Exam: The final exam is optional and comprehensive. If you choose to take it your
score on the final exam will be averaged with your lowest midterm score. The
final is scheduled for 1:30–4:30 PM, Tuesday, December 13th.
Project: We will use TradeSim software to conduct a trading simulation project. TradeSim is
a web-based simulator of futures and options markets where you can conduct
simulated trades in real time. The projects will be conducted in groups and the goal of
the project will be to use the knowledge gained in this course to conduct profitable
trading strategies while controlling risks. You will turn in a report of your trading
activities, including an explanation of your trading strategy and analysis regarding
each trade you made.
ACE 428
M. Mallory
Fall 2011
Grading Policy:
Homework/Quizzes......……20%
Exams………....……………70% (35% for each midterm)
TradeSim Project…...……...10%
Final is optional and averages with lowest midterm score. We will use +/- in
assigning final letter grades.
Field Trip: We take an optional field trip to Chicago where we will visit the CBOE and
CME Group facilities. We will observe firsthand what happens on the trading
floor of a major commodity exchange. I encourage you to attend if at all possible.
Check the course website for additional details as they come available.
Academic Dishonesty: I take academic integrity extremely seriously, and expect you to
do the same. If you are uncertain as to what this means, please read Infractions of
Academic Integrity—Definitions in the Student Pocket Code. If I discover that
anyone has engaged in dishonorable conduct (cheating on one of the exams,
plagiarism on the project, etc.) I will not hesitate to impose strict sanctions on the
student(s) involved. At a minimum, this will involve failing the exam or paper in
question.
Special Needs: If you have special needs make an appointment and we will discuss
suitable accommodations.
ACE 428
M. Mallory
Fall 2011
WEEKLY CLASS SCHEDULE 2011
Date
Topic
Reading/Assignment
8/23
Introduction
Module 1
8/25
9/1
9/8
9/15
Historical development of futures trading in the
U.S.; Basics of exchanges, Clearing, and Margins
Contract basics, Finding and Reading Quotes,
Types of orders; Settlement; Volume and open
interest, delivery
Introduction to options contracts; Money-ness;
Strike price; Payoff and profit diagrams; Contract
specs; American vs European options;
More on options; Intrinsic value; Time value;
Reading quotes; Margins; Settlement
Module 2
Module 3
Module 4
Module 5
9/22
Synthetic positions; Put-Call parity
Module 6
9/29
Speculative Option Positions; Bull spreads; Bear
spreads
Module 7
10/4*
Midterm Exam 1 (Modules 1-6)
10/6
10/13
Speculative Option Positions (cont); Butterfly
spreads; Straddles. Prices through space- Basis
Pass back exams; Storage and prices through
time
Module 8
Module 9
10/20
Hedging; Optimal hedging
Module 10
10/27
Hedging with Options
Module 11
11/3
Cross Hedging and Multi-market hedges
Module 12
11/8*
Midterm Exam 2 (Modules 7-11)
11/10
Option pricing models; Binomial
Module 13
11/17
Pass back exams; Option pricing models; BlackScholes
Module 14
12/1
Interest rate futures and stock index futures
Module 15
12/6*
Final Exam Review
12/13
FINAL EXAM 1:30pm (Modules 12-15)
*Please note exam dates are Tuesdays
ACE 428
M. Mallory
Fall 2011