At noon (central time), Monday, August 28, 1995, the Iowa Electronic Markets (IEM) will open trade in a series of contracts based on price levels of securities in the computer industry. This document describes these contracts. Except as specified in this prospectus, trading rules for the computer these contracts are the same as those specified in the Trader's Manual for the Iowa Electronic Markets.
The liquidation values for these contracts are determined solely by closing prices of Microsoft Corp. Common Stock (MSFT). Each month, an initial pair of contracts will consist of "MSxxxmH" and "MSxxxmL," where "xxx" corresponds to a "cutoff" price of $xxx and "m" corresponds to the liquidation month as given in the following table:
Month Code Month Code Month Code January a May e September i February b June f October j March c July g November k April d August h December lThe payoff for the "H" contract will equal $1.00 if the Wall Street Journal closing price for Microsoft Common Stock on the third Friday month "m" exceeds $xxx. It will equal $0.00 otherwise. The payoff for the "L" contract will equal $1.00 if the Wall Street Journal closing price for Microsoft Common Stock on the third Friday month "m" is less than or equal to $xxx. It will equal $0.00 otherwise.
We will choose $xxx to correspond to the strike price of the exchange traded option that lies closest to the price of Microsoft Common Stock on the date we create the contracts.
Thus, the initial contracts are:
Contract Underlying Fundamental Liquidation Value MSxxxmH Microsoft Common Stock $1.00 if MSFT closing price>$xxx MSxxxmL Microsoft Common Stock $1.00 if MSFT closing price<=$xxx
When a split occurs, the original contract will be split into two contracts. If the MSxxxmH contract is split, all traders holding an MSxxxmH contract will receive in its place a "new" MSxxxmH contract and an MSyyymH contract where yyy is a new, higher cutoff price level. After the split, MSxxxmH contracts will pay $1.00 if the MSFT closing price on the third Friday of the liquidation month is higher than $xxx and lower than or equal to $yyy. MSyyymH contracts will pay $1.00 if the MSFT closing price on the third Friday of the liquidation month is higher than $yyy. Thus, splits determine mutually exclusive ranges of prices over which each contract pays. Since the value of the two new contracts differ, outstanding bids and asks for MSxxxmH will be canceled at the time of the split. Since the payoffs to MSxxxmL are unaffected by the split, bids and offers for this contract will remain.
If the MSxxxmL contract is split, all traders holding an MSxxxmL contract will receive in its place a "new" MSxxxmL contract and a MSzzzmL contract where zzz is a new, lower cutoff price level. Similar splits of any other "H" or "L" contracts may also occur. All other aspects of these splits and the payoffs from the resulting contracts are analogous to those described above. Again, splits determine mutually exclusive ranges of prices over which each contract pays.
If Microsoft stock is de-listed, the last available closing price will be used as the closing price for determining liquidation values.
If Microsoft stock undergoes a stock split during the trading period, the closing price of its stock used to calculate payoffs will be adjusted to take account of this split. Specifically if each existing share is split into M shares, then the closing price used to calculate payoffs will be multiplied by M since this represents the value of one pre-split share in the company. Stock dividends will be treated in the same manner.
Portfolios may also be purchased and sold at current market prices. To buy a market portfolio at current ASK prices, use the "Purchase" option as above but enter the appropriate market portfolio name as the contract name. To sell this portfolio at current BID prices, use the "Sell" options as above but enter the appropriate market portfolio name as the contract name. Market portfolio names are MKTm for liquidation month "m."
Note 1: Generally, exchange traded options for the underlying stocks expire on the Saturday following the third Friday of each month. In the event that the options' expiration dates change for any reason, we will change the dates used to determine contract creations, liquidations, returns and payoffs accordingly.