IEM PROSPECTUS: 2003 California Governor Recall Ballot 1 Market

At 1:00 pm, Central Standard Time, Wednesday, August 27, 2003, the Iowa Electronic Market (IEM) will open trading in a market based on the first ballot question of the California Governor Recall election scheduled for October 7, 2003. This document describes that market and should be viewed as a supplement to the Trader's Manual. Except as specified in this prospectus, trading rules for this market are the same as those specified in the Trader's Manual for the Iowa Electronic Market.

Contract liquidation values in this market will be determined by the outcome of the first half of the ballot in the recall election -- the question of whether or not to recall Mr. Gray Davis as Governor of California. At market open, there will be five contracts listed in the market, two representing the shares of votes cast for and against the recall issue, two more representing the discrete Yes/No outcome of the decision to recall, and a third representing the event that the October election is canceled. Other contracts may be added to this market according to the contract spin-off procedure described below.


CONTRACTS AND LIQUIDATION VALUES

The financial contracts initially traded in this market are as follows:

No-Election Contract
Code Liquidation rule
CNCLLD_1     $2.00 if the recall election is NOT conducted in October, 2003; $0.00 if the election is held.

This contract represents the contingency of no election. The California Governor Recall election is an unusual event, one fraught with many uncertainties. Among those uncertainties is the possibility that the election, scheduled for October 7, 2003, does not occur. Should it happen that the election is cancelled or postponed beyond October 31, this CNCLLD_1 contract will have a value of $2.00; if the election is conducted before the end of October, its liquidation value will be zero.

Vote Share Contracts
Code Liquidation rule
RCL_VS_YES $1.00 times the share of votes cast in favor of recall if the October, 2003 election is held; $0.00 if there is no recall election in October, 2003.
RCL_VS_NO     $1.00 times the share of votes cast against recall if the October, 2003 election is held; $0.00 if there is no recall election in October, 2003.

These two Vote Share contracts represent the shares of the vote cast in favor of and against recall, respectively. The vote shares are computed as "the number of votes cast for recall divided by the total of votes for and against" and "the number of votes cast against recall divided by the total of votes for and against". Those two numbers must necessarily add to one. After the election and the subsequent close of the market, the liquidation values of the two contracts will be determined as $1.00 times the associated vote share. If the election is canceled or postponed beyond the end of October, those vote shares cannot be computed and RCL_VS_YES and RCL_VS_NO vote share contracts will have values of $0.00.

Outcome Contracts
Code Liquidation rule
GD_OUT     $1.00 if the election is held in October, 2003 and if more votes are cast in favor of recall than against; $0.00 otherwise
GD_IN     $1.00 if the election is held in October, 2003 and if more votes are cast against recall than in favor; $0.00 otherwise

These two contracts are associated with the discrete outcome of the recall election. If the election is conducted and more votes are cast in favor of recall than against, the GD_OUT contract will have a value of $1.00 and the other contract will be worth $0.00. If more votes are cast against recall than in favor, the GD_IN contract will have a value of $1.00 and the GD_OUT contract will be worth $0.00. Should the election be canceled or postponed beyond the end of October, the outcome of the election cannot be determined; in that case the value of both the GD_OUT and GD_IN contracts will be declared to be $0.00.

The Los Angeles Times, online version will be the official source for recall election results. The judgment of the IEM Governors and Directors will be final in resolving questions of interpretation and typographical or clerical errors.


CONTRACT BUNDLES

Fixed-price bundles consisting of one share of each of the contracts listed in this market, including the No-Election contract, all Vote Share contracts and all Outcomes contracts, can be purchased from or sold to the IEM exchange at any time. The price of each bundle is $2.00. Because the contracts are designed so that the sum of the liquidation values across all contracts in the market is exactly equal to $2.00 regardless of the outcome, the total payoff from holding a bundle consisting of one of each contract until the market closes is $2.00. Specifically, if the election is canceled, the CNCLLD_1 contract will be worth $2.00 and all other contracts will have values of $0.00, making the total liquidation value of the bundle $2.00. If the election is held, the CNCLLD_1 contract will be worth $0.00, the total value of the two Vote Share contracts will be $1.00, and one or the other of the Outcomes contracts will be worth $1.00 while the other will have a value of $0.00, again making the total value of the bundle $2.00.

To buy or sell fixed-price bundles from the IEM exchange, use the "Market Orders" option from the trading Console. Select the option "RECALL1_$2 (buy at fixed price)" from the Market Orders list to buy bundles of one each of all contracts in the market, and select the "RECALL1_$2 (sell at fixed price)" to sell bundles. A bundle can only be sold if the trader's current portfolio includes one of each contract in the market, and bundle purchases can be made only if the trader's portfolio includes sufficient cash to cover the purchase. Purchases are charged to the trader's cash account and sales will be credited to the cash account.

Bundles consisting of one share of each of the contracts in the market may also be purchased and sold at current aggregate market prices rather than the fixed price of $2.00. To buy a bundle at current ASK prices, use the "Market Order" option as above but select the option "RECALL1_$2 (buy at market prices)". Similarly, select the options "RECALL1_$2 (sell at market prices)" to sell a bundle at current BID prices.


CONTRACT SPIN-OFFS

The Directors of the IEM reserve the right to introduce new contracts to the market as spin-offs of existing contracts. When a contract spin-off occurs, a specified existing contract will be replaced by two or more new contracts. No holder of pre-spinoff contracts will be adversely affected. Traders will receive the same number of each of the new contracts as they held in the original contract, and the sum of the liquidation values of the new contracts will equal the liquidation value of the original contract. All outstanding limit orders for the contract to be replaced will be canceled immediately prior to of the spinoff. The new contracts will be included in all subsequent bundle purchases and sales.

As an example, the Directors may decide to replace the GD_OUT contract with two contracts, say GD_OUT_50 and GD_OUT_60, with GD_OUT_50 reflecting the outcome that between 50 and 60 percent of the votes are cast in favor of recall and with GD_OUT_60 representing the outcome that more than 60 percent of the votes are cast in favor of recall.

Spin-offs will be announced at least two days in advance. The new contract names, the specifications regarding liquidation values and the timing of the spin-off will be included in the announcement. This announcement will appear as an Announcement on the WebEx login screen.


MARKET CLOSING

This market will close at 1:00 PM, C.D.T. two days after the recall election, or two days after the official announcement of cancellation or postponement beyond October 31st. At that time, or as soon thereafter as results are available, liquidation values will be declared and funds credited to the cash accounts of market participants.


MARKET ACCESS

All current and newly enrolled IEM traders with US dollar denominated accounts will automatically be given trading rights in the 2003 California Governor Recall Ballot 1 Market. Access to the market is achieved by choosing RECALL_1 from the "Market Selection" pull-down menu on either the Login-Welcome screen or at the bottom of the Trading Screen.

Funds in a trader's cash account are fungible across markets, so new investment deposits are not required. Additional investments up to the maximum of $500 can be made at any time. Requests to withdraw funds may be submitted at any time by sending email to the IEM Office (iem@uiowa.edu).