Prospectus: MSFT (Microsoft) Price Level Market
At noon (central time), Monday, January 18, 1999, the Iowa Electronic Markets (IEM) opened 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.
Each month, a new set of winner-takes-all contracts will be offered in this market. Contract liquidation values will determined by closing stock price levels on the third Friday of the month after contracts are created (see note 1 below).
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 "MSxxx_yymH" and "MSxxx_yymL," where "xxx" corresponds to a "cutoff" price of $xxx, "yy" represents the year 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 l
The 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" year "yy" 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" year "yy" 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|
|MSxxx_yymH||Microsoft Common Stock||$1.00 if MSFT closing price>$xxx|
|MSxxx_yymL||Microsoft Common Stock||$1.00 if MSFT closing price<=$xxx|
If the trading price of a particular contract becomes unusually high, the Directors of the IEM may authorize a contract split. The decision to split a contract will be announced at least two days in advance of the split, and the new contract names and the timing of the split will be included in the announcement. This announcement will appear as a News Bulletin on your screen.
When a split occurs, the original contract will be split into two contracts. If the MSxxxmH contract is split, all traders holding an MSxxx_yymH contract will receive in its place two "new" contracts: An MSxxx-zzz_yym contract and an MSzzz_yymH contract where zzz is a new, higher cutoff price level. After the split, MSxxx-zzz_yym 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 $zzz. MSzzzmH contracts will pay $1.00 if the MSFT closing price on the third Friday of the liquidation month is higher than $zzz. 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 MSxxx_yymH will be canceled at the time of the split. Since the payoffs to MSxxx_yymL are unaffected by the split, bids and offers for this contract will remain.
If the MSxxx_yymL contract is split, all traders holding an MSxxxmL contract will receive in its place two "new" contracts: MSqqq-xxx_yym contract and a MSqqq_yymL contract where qqq is a new, lower cutoff price level. Similar splits of any other 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.
NOTE: On April 27, 2000 the naming convention was updated to make the meaning of contract names clearer after splits. All other aspects of splits remain unchanged.
Existing contracts will be liquidated by the IEM on the Monday after the third Friday of each month (see note 1). The Midwest Edition of the Wall Street Journal will be the official source of closing prices.
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.
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 $1.00. To buy and sell bundles, select the appropriate bundle from the "Market Order" drop down menu on the market trading screen. Unit portfolio bundle names are Msft_1$yym for year "yy" month "m" liquidation.
Current and newly enrolled IEM traders with academic affiliation will automatically be given access rights to the MSFT (Microsoft) Price Level 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.