Prospectus: Computer Industry Returns Market
At noon (central time), Monday, August 28, 1995, the Iowa Electronic Markets (IEM) will open trade in a series of contracts based on the returns of securities in the computer industry. This document describes these contracts. Except as specified in this prospectus, trading rules for these contracts are the same as those specified in the Trader's Manual for the Iowa Electronic Markets.
Each month, a new set of winner-takes-all contracts will be offered in this market. Contract liquidation values will determined by rates of return measured from the third Friday of one month to the third Friday of the next month (see note 1 below).
The liquidation values for these contracts are determined solely by the dividend adjusted rates of return of Apple Computer, Inc. Common Stock (AAPL, listed on NASDAQ), International Business Machines Corporation Common Stock (IBM, listed on the NYSE) and Microsoft Corporation Common Stock (MSFT, listed on NASDAQ); and the capital gains rate of return on the Standard and Poor's 500 Index. Whichever of these has the highest rate of return as specified below will pay off $1.00 per contract. All other contracts will pay off zero (see note 2 below).
Contracts will be designated by a ticker symbol and a letter denoting the month of contract liquidation. Thus, the contracts traded in this market for liquidation in year "yy" month "m" are:
|Code||Contract Description||Liquidation Value|
|AAPL_yym||Apple Computer||$1.00 if AAPL return is highest|
|IBM_yym||IBM||$1.00 if IBM return is highest|
|MSFT_yym||Microsoft||$1.00 if MSFT return is highest|
|SP500_yym||S&P 500 Market Index||$1.00 if SP500 return is highest|
The code "yy" stands for the year. The month code, "m," refers to the month of liquidation as given by 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 l
For AAPL, IBM and MSFT, we will compute the dividend adjusted rate of return based on closing stock prices of the underlying listed firm between the third Friday in the liquidation month and the third Friday in the previous month. For these purposes, we will use closing prices as reported in the Midwest edition of the Wall Street Journal.
The Dividend Adjusted Rate of Return is calculated as follows: First, we compute the raw return on the underlying stock (the closing price on the third Friday of the liquidation month, minus the closing price from the third Friday of the previous month, plus any dividends on ex-dividend dates). Then, we divide the raw return by the closing stock price from the previous month to arrive at the dividend adjusted rate of return.
For the SP500 contract, we compute the capital gains rate of return by subtracting the closing index value on the third Friday of the previous month from the closing index value on the third Friday of the liquidation month and then divide by the previous month's closing index value.
Existing contracts will be liquidated by the IEM on the Monday after the third Friday of each month (see note 1 below). The Midwest Edition of the Wall Street Journal will be the official source of closing prices.
If one of the companies is de-listed, the last available closing price will be used as the closing price for determining liquidation values.
If one of the companies 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.
LISTING NEW CONTRACTS
New contracts will be created by the IEM on the Monday after the third Friday of each month (see note 1 below).
Contracts may be moved across and within market display windows to facilitate access. However, once trading commences in any contract, it will remain listed until the liquidation value is determined.
For each month's contracts, unit portfolios consisting of bundles of contracts whose payoff is guaranteed to be $1.00 and can be purchased from or sold to the IEM system at any time. The price of each unit portfolio is $1.00. To buy and sell bundles, select the appropriate bundle from the "Market Order" drop down menu on the market trading screen. Unit portfolio bundle names are Comp_1$yym for year "yy" month "m" liquidation.
Current and newly enrolled IEM traders with academic affiliations will automatically be given access rights to the Computer Industry Returns Market. Access to the contracts is achieved via the "Market Selection" pull down menu.
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. New traders can open accounts using the IEM OnLine Account Application page at http://iemweb.biz.uiowa.edu/signup. There is a one-time account registration fee of $5.00, and investments are limited to the range of $5.00 to $500.
Requests to withdraw funds may be submitted at any time by completing the IEM's Online Withdrawal Request form or by completing and mailing the paper version of the request form. Additional information about requesting withdrawals is available at tippie.uiowa.edu/iem/accounts/withdrawals.html.
Addendum: Beginning with the August 2003 contracts, the naming convention changed to include the year ("yy") in each contract and bundle name.
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.
Note 2: If two or more contracts tie for the highest return, the $1.00 will be divided as evenly as possible among the tied contracts with any residual $0.001's allocated in order of the highest to lowest final values.