Iowa Electronic Markets

IEM PROSPECTUS

MSFT (MICROSOFT) PRICE LEVEL MARKET
WINNER-TAKES-ALL CONTRACTS


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.


CONTRACTS

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 "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   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" 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


CONTRACT SPLITS

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 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.


CONTRACT LIQUIDATION

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.


UNIT PORTFOLIOS

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 $1.00. Use the "Purchase" option from the TRADING MENU and enter the bundle name as the contract name to buy unit portfolios. Use the "Sell" option from the TRADING MENU, with the bundle name, to sell unit portfolios. Purchases will be charged to your cash account and sales will be credited to your cash account. Unit portfolio bundle names are 1$m for month "m" liquidation.

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."


ACCESS

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" option on any of the menus. Funds in a trader's cash account are fungible across all contracts so new investment deposits are not required. Additional investments up to the maximum of $500 can be made at any time. With five days' advance notice, funds may be withdrawn on the 15th of any month.


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.