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MGEX will launch new index contracts on December 15
By Doug Rich
On December 15, at 7:30 p.m., the Minneapolis Grain Exchange (MGEX) will launch five financially settled agricultural futures and options index contracts. These contracts include a National Corn Index (NCI), National Soybean Index (NSI), Hard Red Winter Wheat Index (HRWI), Soft Red Winter Index (SRWI), and Hard Red Spring Wheat Index (HRSI).
MGEX has signed a unique arrangement with the Chicago Board of Trade (CBOT) which will host electronic trading of these financially settled agricultural futures and options on e-cbot powered by LIFFE CONNECT. The addition of Wheat index contracts makes it possible to trade financially settled futures and options on three major classes of Wheat on a single exchange and on a single electronic trading platform.
These index contracts will reduce basis exposure; offer simultaneous expiration of futures and options; track prices at the country elevator level; be exclusively electronic; and all months will be traded. This offers traders and hedgers new opportunities for basis and spread trading. The agricultural index contracts will settle financially each calendar month to a three-day average of the corresponding spot index. MGEX agricultural index futures are settled based on numbers provided by the Data Transmission Network (DTN). DTN gathers daily bids from numerous U.S. elevators. DTN collects approximately 400 daily bids for hard red winter Wheat 230 bids for hard red spring wheat, 350 bids for soft red winter wheat, 1,700 bids for corn, and 1,600 bids for soybeans. This means the indexes are weighted to actual centers of production. These contracts provide price discovery based on Wheat originated at country elevators and are very closely related to local cash prices for each Wheat class.
MGEX index futures and options offer new ways to trade between markets, establish synthetic basis trades, and more accurately hedge positions in the country. The real value of this launch is a basis contract. Traders of wheat, corn, and soybeans can better manage the basis by using futures to create synthetic basis positions. Because MGEX indexes are highly correlated to their respective underlying cash markets, basis can be hedged by trading the spread between MGEX index futures and their corresponding deliverable counterparts.
The Minneapolis Grain Exchange was founded in 1881 by 21 businessmen. Their goal was to develop a centralized marketplace to make supplies more reliable and to establish fair prices. It is the primary market for hard red spring wheat.
Date: 11/22/04
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