Iowa Electronic Markets Henry B. Tippie College of Business W283 PBB University of Iowa Iowa City, IA 52242 iem@uiowa.edu IEM PROSPECTUS 1996 CONGRESSIONAL CONTROL MARKET On Friday, September 20, 1996, the Iowa Electronic Market (IEM) will open trading in a market based on the composition of the two houses of Congress following the November 1996 U.S. elections. This document describes that market and should be viewed as a supplement to the Trader's Manual. Except as specified in this prospectus, trading rules for this market are the same as those specified in the Trader's Manual for the Iowa Electronic Market. Payoffs in this 1996 Congressional Control market will be determined by whether the Republican Party holds an absolute majority of seats in each house of Congress after the November election. (Absolute majority requires 218 or more seats in the House and 51 or more in the Senate.) There are four contracts in this market representing four possible unique outcomes. The liquidation value of the contract which represents the actual outcome of the election will be $1.00. All other contracts will have a value of zero. CONTRACTS -- The financial contracts traded in this market are: Symbol Contract Name RhRs Republican House, Republican Senate RhNs Republican House, Non-Republican Senate NhRs Non-Republican House, Republican Senate NhNs Non-Republican House, Non-Republican Senate The first two letters of the contract symbol represent the net effect of the U.S. House of Representative elections: Rh means that Republicans hold 218 or more of the 435 seats in the House; Nh means that Democrats together with any other non-Republicans hold 218 or more seats in the House. The last two letters in the symbol represent the net effect of the U.S. Senate elections: Rs means that Republicans hold 51 or more of the 100 seats in the Senate; Ns means that Democrats together with other non-Republicans hold 50 or more seats in the Senate. Note that an even split of seats in the Senate is resolved in favor of the Ns contract. All references to "House seats" in this document are to voting seats in the House of Representatives and specifically exclude those non-voting seats held by Representatives from American Samoa, Guam, Puerto Rico, the U.S. Virgin Islands, and the District of Columbia. DETERMINATION OF LIQUIDATION VALUES -- This is a winner-takes-all market. The contract that denotes the actual outcome of the election will have a liquidation value of $1.00; all others will have values of $0.00. For example, if as a result of the November 5, 1996 elections, Republicans hold 217 seats in the House and 51 seats in the Senate, the contract NhRs will have a value of $1.00 and the other three contracts will have values of zero. The New York Times and Congressional Quarterly Weekly Report will be the official sources for election results and party affiliations of continuing Senators, respectively. For purposes of determining payoffs, we will use the composition of the House and Senate as determined by each member’s declared party affiliation at the time of the election. For Representatives and newly elected Senators, this will be their party affiliations as shown on the election ballot. For Senators not standing for re-election, this will be their party affiliations as reported in the most recent Congressional Quarterly Weekly Report at the time of the election. Liquidation formulas can be viewed by first selecting Display Options and then choosing Liquidation Formulas. MARKET CLOSING -- This market will close at noon, November 6, 1996, the Wednesday of election week. At that time, or as soon thereafter as official election returns are announced, liquidation values will be declared and funds credited to the cash accounts of market participants. UNIT PORTFOLIOS -- Unit portfolios consisting of one share of each of the contracts in this market can be purchased from or sold to the IEM system at any time. The price of each unit portfolio is $1.00. Since exactly one of the four represented Congressional compositions will result from the election, the total payoff from holding a unit portfolio until the market closes is $1.00. To buy unit portfolios from the system, use the "Purchase" option from the TRADING MENU and enter 1$ as the contract name. To sell unit portfolios to the system, use the "Sell" option from the TRADING MENU and enter 1$ as the contract name. Purchases will be charged to your cash account and sales will be credited to your cash account. Unit portfolios may also be purchased from and sold to other traders at current market prices. Use the Purchase and Sell options as above but enter MKT as the contract name. The price charged for market portfolio purchases will be determined as the sum of current ask prices, and the price received for market portfolio sales will be the sum of current bid prices. Should no corresponding bid or ask be present for one of the contracts, that contract will be excluded from the portfolio; otherwise the number of units purchased or sold will be the same in each contract. MARKET ACCESS -- Current and newly enrolled IEM traders will automatically be given access rights to the 1996 Congressional Control market. Access to this market is achieved via the "Market Selection" option on the Login, Market, and other Menus. Funds in a trader's cash account are fungible across all markets 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.