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.
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 month "m" are:
Code Contract Description Liquidation Value AAPLm Apple Computer $1.00 if AAPL return is highest IBMm IBM $1.00 if IBM return is highest MSFTm Microsoft $1.00 if MSFT return is highest SP500m S&P 500 Market Index $1.00 if SP500 return is highestThe 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
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.
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.
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.
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.
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.