Iowa Electronic Markets Henry B. Tippie College of Business W283 PBB University of Iowa Iowa City, IA 52242 iem@uiowa.edu IEM PROSPECTUS 1996 PRESIDENTIAL ELECTION VOTE-SHARE MARKET On Sunday, February 4, 1996, the Iowa Electronic Market (IEM) will open trading in a vote-share market based on the 1996 Presidential election. 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 the Presidential Vote-Share market will be determined by the percentage of the total Democratic and Republican popular vote each candidate receives in the 1996 U. S. Presidential Election. For instance, contracts for a candidate that receives 32.4% of the total popular vote received by the Democratic and Republican nominees, will be worth 32.4 cents each. CONTRACTS -- Initially the market will consist of four pairs of contracts representing the Democratic presidential nominee matched against each of four possible Republican Convention outcomes. When the Republican nominee is determined, all contract pairs related to other Republican nominees will expire worthless and be removed from the market. Two contracts will then remain in the market: one representing the Democratic nominee and one representing the Republican nominee. The payoff to the Democratic Nominee contract will be $1 times the percentage of the total Democratic and Republican popular vote that the Democratic Nominee receives in the 1996 U. S. Presidential Election. Similarly, the payoff to the Republican Nominee contract will be $1 times the percentage of the total Democratic and Republican popular vote that the Republican Nominee receives in the 1996 U. S. Presidential Election. At market open, the financial contracts traded in this market are: Code Contract Name V.DOLE Robert Dole CL|DOLE Democratic nominee versus Dole V.FORB Steve Forbes CL|FORB Democratic nominee versus Forbes V.GRAM Phil Gramm CL|GRAM Democratic nominee versus Gramm V.OREP All Other Republican Candidates CL|OREP Democratic nominee versus all Other Republican nominees The contract, V.DOLE, represents the Republican candidate, Robert Dole. The contract CL|DOLE represents the Democratic Nominee in a race against Dole. If Dole does not become the official Republican nominee for President, then these two contracts will expire worthless and will be removed from the market. Similarly, the contracts, V.FORB and V.GRAM, represent the specific Republican candidates, Steve Forbes and Phil Gramm, and the contracts, CL|FORB and CL|GRAM represent the Democratic Nominee in a race against Forbes and Gramm, respectively. If the candidate does not become the official Republican nominee for President, then the associated contract pair will expire worthless and will be removed from the market. The label V.OREP represents all other Republican candidates. The contract CL|OREP represents the Democratic Nominee in a race against all other Republican candidates. If a candidate represented by a candidate-specific contract becomes the Republican nominee for President, then the V.OREP and CL|OREP contracts will expire worthless and will be removed from the market. Contracts related to specific Republican candidates will have a non-zero liquidation value only if the associate candidate receives the official Republican Nomination. The contracts related to all other Republican candidates will have a positive liquidation value only if a candidate not represented by a candidate-specific contract becomes the official Republican nominee for President. The label "CL" is used for ease of identification. Throughout the operation of the market, "CL" will always represent the Democratic presidential nominee. CONTRACT SPIN-OFFS -- A pair of new candidate-specific contracts will be spun off in this market whenever the price of that candidate in the IEM Republican Convention Market exceeds $.10. When new, candidate-specific contracts are created, they will be spun-off from the V.OREP and CL|OREP contracts. Each V.OREP contract will be replaced by two new contracts: a candidate-specific Republican nominee contract and a new V.OREP contract. The new V.OREP contract will represent all remaining un-named Republican candidates in the market. Each CL|OREP contract will be replaced by two new contracts: a new Democratic Nominee versus specified Republican opponent contract and a new CL|OREP contract. The new CL|OREP contract will represent the Democratic Nominee's vote share against all remaining un-named Republican candidates in the market. Since the value of the V.OREP and CL|OREP contracts may change when new candidate-specific contracts are spun off, all outstanding V.OREP and CL|OREP bids and asks will be canceled at the time of the spinoff. Contract spin-offs will be announced in the IEM News Screen at least two days in advance of the spin-off. CONTRACT RETIREMENT -- Once each party's nominee has been officially determined, trading in the contracts related to all unnominated candidates will cease and those contracts will expire worthless. The remaining Republican and Democratic parties' contract will represent the Republican and Democratic parties' nominee, respectively. If that candidate subsequently drops out of the Presidential race, his or her contract will denote the person designated as the official replacement by his or her party. DETERMINATION OF LIQUIDATION VALUES -- Once the nominees have been determined, all other contracts will be declared worthless and expire. The remaining contracts in this vote-share market will pay off $1.00 times that candidate's share of the popular vote received by the Democratic and Republican nominees in the 1996 U. S. Presidential Election. For purposes of determining liquidation values, we will use the vote shares reported in the New York Times on Friday, November 8. 1996. In the event that votes shares are not reported in that edition of the New York Times, we will use the vote shares last reported in the New York Times. THIRD PARTY CANDIDATES -- This market is based only on the Democratic and Republican popular vote in the 1996 Presidential Election. It will remain unaffected by the entry of any third party candidates into the race. MARKET CLOSING -- This market will close at noon, Wednesday, November 6, 1996, the day after the Presidential election. As soon after the election 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 contracts listed in the Presidential Vote-Share Market can be purchased from or sold to the IEM at any time. The price of each unit portfolio is $1. Since the percentages of the popular vote received by each candidate must sum to one, 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 are charged to your cash account and sales are 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 candidates, contracts in that candidate will be excluded from the portfolio; otherwise the number of contracts purchased or sold will be the same in each candidate. MARKET ACCESS -- Current and newly enrolled IEM traders will automatically be given access rights to the Presidential Vote-Share 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.