All orders placed on the NYMEX to buy or sell contracts are done in a very precise manner where each party involved is fully aware of the details of the transaction. There are specific nuances in the flow of the orders themselves. As legally-binding agreements, non-performance under a futures contract can have severe financial, and legal, consequences. Therefore, most phone conversations are recorded to ensure the accuracy of the orders placed as well as the results of the execution of those orders. Standardized Order Forms are used on the floor of the NYMEX during order execution. Daily "check-outs" occur between Brokers and their clients for verification of all trades conducted that day. In this lesson, we will follow a natural gas futures contract trade from the beginning to end for a producer and end-user wishing to lock-in a fixed-price for a 12-month period ("strip").
At the successful completion of this lesson, students should be able to:
This lesson will take us one week to complete. There are a number of required activities in this module. The chart below provides an overview of the activities for Lesson 7. For assignment details, refer to the location noted.
All assignments will be due Sunday, 11:59 p.m. Eastern Time.
REQUIREMENT | LOCATION | SUBMITTING YOUR WORK |
---|---|---|
Reading Assignment: Chapter 3 | Errera & Brown | No submission |
Mini-lecture: NYMEX Order Flow | Mini-lecture: NYMEX Order Flow page | No submission |
Lesson Activity: OTIS Trading Simulation; "Trading Places" video | Lesson Activity page/ANGEL | Submitted through OTIS |
Lesson 8 Quiz | Summary and Final tasks page | Submitted through ANGEL |
If you have any questions, please post them to our Questions? discussion forum (not e-mail), located under the Communicate tab in ANGEL. The TA and I will check that discussion forum daily to respond. While you are there, feel free to post your own responses if you, too, are able to help out a classmate.
Reading Assignment:
Read Chapter 3 - Errera & Brown
Key Points of Emphasis for Reading Assignment
All orders placed on the NYMEX to buy or sell contracts are done in a very precise manner with each party involved fully aware of the details of the transaction. As legally-binding agreements, non-performance under a futures contract can have severe financial, and legal, consequences. Therefore, most phone conversations are taped to ensure the accuracy of the orders placed as well as the results of the execution of those orders. Standardized Order Forms are used during order execution and daily "check-outs" occur between Brokers and their clients for verification of all trades conducted that day. In this lesson, we will follow a natural gas futures contract trade from the beginning to end for a producer and end-user wishing to lock-in a fixed-price for a 12-month period.
While watching the Mini-Lecture, keep in mind the following key points and questions:
Follow the instructions for your OTIS Trading Simulation posted in the Lesson Resources folder on ANGEL. Also, read the introduction to the "Trading Places" video clip and then view it on ANGEL.
Answer the following questions about the movie clip. Post your answers on the course blog.
1) What position did the "Dukes" take and why?
2) How did they go about this?
3) What position did Dan Akroyd and Eddie Murphy take and why?
4) How did they go about this?
5) What was the financial downfall of the Dukes?
6) What fundamental information was important to the Traders?
Now that we have studied the NYMEX, financial derivative contracts, and the order execution, we will learn how these are used by producers and end-users to reduce their price and supply risk, otherwise known as "hedging."
You have reached the end of Lesson 8. Double-check the list of requirements on the first page of this lesson to make sure you have completed all of the activities listed there before beginning the next lesson. (To access the next lesson, use the link in the "Course Outline" menu at left.)