Iowa Electronic Markets Henry B. Tippie College of Business W283 PBB University of Iowa Iowa City, IA 52242 iem@uiowa.edu IEM PROSPECTUS 1996 HOUSE CONTROL WINNER-TAKES-ALL MARKET At noon (C.D.T.), Monday, August 5, 1996, the Iowa Electronic Market (IEM) will open trading in a winner-takes-all market based on the composition of the US House of Representatives after 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. Liquidation values in this winner-takes-all House Control Market will be determined by whether the Republicans increase the number of seats they hold in the House, maintain an absolute majority but do not increase their lead, or lose the absolute majority. The contract that represents the actual outcome of the election will have a liquidation value of $1.00. All other contracts will expire worthless. For purposes of establishing a baseline for the number of seats currently held, we use the July 27, 1996, Congressional Quarterly Weekly Report. That publication states that there are 235 Republican seats in the U.S. House of Representatives. CONTRACTS -- The financial contracts traded in this market are: Code Contract Name RH.gain Republicans win more than 235 House seats RH.hold Republicans win more than 217 but no more than 235 House seats RH.lose Republicans win 217 or fewer House seats The contract RH.gain represents the outcome that Republicans increase the number of seats they now hold in the House; that is, Republicans hold more than 235 House seats after the election. The contract RH.hold represents the outcome that Republicans maintain an absolute majority in the House, but do not increase their control; that is, Republicans hold more than 217 and less than or equal to 235 House seats. The contract RH.lose represents the outcome that Republicans lose an absolute majority in the House (hold 217 or fewer House seats). All references to "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 market is a winner-takes-all market. The contract that denotes the actual outcome of the election will have a $1.00 liquidation value; all others will expire worthless. For example, if as a result of the November 5, 1996 elections, Republicans hold 230 House seats, the contract RH.hold will pay off $1.00 and the contracts RH.gain and RH.lose will each expire worthless. The New York Times will be our official source of election results. For purposes of determining payoffs, we will use the composition of the House as determined by each member's declared party affiliation on the election ballot. Liquidation formulas can be viewed by first selecting Display Options and then choosing Liquidation Formulas. MARKET CLOSING -- This market will close at noon, Wednesday, November 6, 1996, the day after the election. As soon thereafter as official election returns are announced, liquidation values will be declared and funds credited to the cash accounts of the market participants. UNIT PORTFOLIOS -- Unit portfolios consisting of one of each of the three contracts in the House Control 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 three listed outcomes will occur, 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 in the House Control Market 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 contracts 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 House Control Market. Access to these 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.