IEM PROSPECTUS: 2003 California Governor Recall Ballot 2 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 second 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 second half of the ballot in the recall election -- the question of who will replace Gray Davis as Governor of California if the recall is approved. At market open, there will be seven contracts listed in the market, three representing the shares of votes cast for candidates for the position, three more representing the discrete outcome of who wins, and a seventh 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_2     $2.00 if the recall election is NOT conducted in October, 2003; $0.00 if the election is held.

This contract represents the contingencies of no election or no reported vote counts on the second ballot question. 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, or even if it does occur that the results of the second half of the ballot are not made public if the recall is rejected on the first half of the ballot. Should it happen that the second ballot vote counts are not made public or that the election is canceled or postponed beyond the end of October, this CNCLLD_2 contract will have a value of $2.00; if the election is conducted by October 31, 2003 and the second ballot vote counts are made public, its liquidation value will be zero.

Vote Share Contracts
Code Liquidation rule
B2_VS_CB $1.00 times the share of votes cast in favor of Cruz Bustamante on the second half of the ballot; $0.00 if there is no recall election in October, 2003 or the 2nd half votes are not reported.
B2_VS_AS $1.00 times the share of votes cast in favor of Arnold Schwarzenegger on the second half of the ballot; $0.00 if there is no recall election in October, 2003 or the 2nd half votes are not reported.
B2_VS_ROF $1.00 times the share of votes cast for all other candidates combined on the second half of the ballot; $0.00 if there is no recall election in October, 2003 or the 2nd half votes are not reported.

The first two Vote Share contracts represent the shares of the vote cast in favor of specific candidates, and the third represents the share cast for all candidates on the ballot but not represented by candidate-specific contracts. The vote shares are computed as "the number of votes cast for the specified candidate or group of candidates divided by the total of votes cast for all candidates." The sum of these vote shares computed for each of the contracts in the market must necessarily add to one. After the market closes, the liquidation values of the contracts will be determined as $1.00 times the associated vote shares. If the election is canceled or postponed beyond the end of October, or if the election is held but the vote counts are not made public, those vote shares cannot be computed and the Vote Share contracts will then have values of $0.00.

Winner Contracts
Code Liquidation rule
B2_W_CB     $1.00 if the election is held in October, 2003 and Cruz Bustamante wins a plurality of votes in the second part of the ballot; $0.00 otherwise.
B2_W_AS     $1.00 if the election is held in October, 2003 and Arnold Schwarzenegger wins a plurality of votes in the second part of the ballot; $0.00 otherwise
B2_W_ROF     $1.00 if the election is held in October, 2003 and a candidate not represented by a candidate-specific Winner contract wins a plurality of votes in the second ballot; $0.00 otherwise

These three Ballot 2 Winner contracts are associated with the discrete outcome of the recall election. Each candidate on the second half of the Recall Election ballot is associated with one and only one contract in this set. The contract associated with the candidate who is a plurality winner, that is the candidate who receives more votes than any other candidate, will have a post-election liquidation value of $1.00. All other contracts will be worth zero. Should the election be canceled or postponed beyond the end of October for any political or legal reason, or if the election is conducted but the results of the second half of the ballot are not made public, the winner of the second half of the ballot cannot be determined; in that case the value of each and every Ballot 2 Winner contract will be declared to be $0.00.

Note that the determination of liquidation values for all Ballot 2 Market contracts is independent of the outcome of the recall issue on the first part of the ballot. If the election is held in October and the second half results are made public, the CNCLLD_2 contract will have a liquidation value of zero and the Vote Share and Winner contract liquidation values will be computed as above, whether or not Gray Davis is recalled as a result of the first part of the ballot. 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 Winner 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 or if the election is held but the second part results are not made public, the CNCLLD_2 contract will be worth $2.00 and all other Ballot 2 contracts will have values of $0.00, making the total liquidation value of the bundle $2.00. If the election is held and all results are released, the CNCLLD_2 contract will be worth $0.00, the total value of the Vote Share contracts will be $1.00, and one of the Winner contracts will be worth $1.00 while the others 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 "RECALL2_$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 "RECALL2_$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 "RECALL2_$2 (buy at market prices)". Similarly, select the options "RECALL2_$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 B2_VS_ROF contract with two contracts, say B2_VS_FL, and a revised B2_VS_ROF, with B2_VS_FL reflecting the vote share of a candidate with first initial F and second initial L, and with the revised B2_VS_ROF contract now representing the combined vote shares of the reduced set of candidates without candidate-specific contracts.

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 2 Market. Access to the market is achieved by choosing RECALL_2 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).