IEM Prospectus: Index Returns Market
At 9:00am (CDT), Monday, September 23, 2019, the Iowa Electronic Markets (IEM) opened trade in a series of contracts based on the returns three indexes. 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.
CONTRACTS
Each month, a new set of winner-takes-all contracts will be offered in this market. Contract liquidation values will determined by rates of return measured from the third Friday of one month to the third Friday of the next month (see note 1 below).
The liquidation values for these contracts are determined solely by the dividend adjusted rates of return of
- I_DSW: An index based on the common stocks of Walt Disney Company (DIS, listed on NYSE), Simon Property Group Inc (SPG, listed on NYSE), and Walgreens Boots Alliance Inc. (WBA, listed on NASQAQ)
- I_GMX: An index based on the common stocks of General Motors Company (GM, listed on NYSE), Microsoft Corporation (MSFT, listed on NASQAQ),and Exxon Mobil Corporation (XON, listed on NYSE)
- SP500: The S&P 500 Index published by S&P Dow Jones Indices LLC
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 name, a letter denoting the month of contract liquidation, and two digits denoting the year of contract liquidation. Thus, the contracts traded in this market for liquidation in month “m” of 20yy are:
| Contract | Company | Description |
| I_DSWmyy | Capitalization-weighted index of the prices of the common stocks DIS, SPG, WBA | $1.00 if I_DSW return is the highest |
| I_GMXmyy | Capitalization-weighted index of the prices of the common stocks GM, MSFT, and XON | $1.00 if I_GMX return is the highest |
| SP500myy | The S&P 500 Index published by S&P Dow Jones Indices LLC | $1.00 if SP500 return is the highest |
The 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 |
COMPUTING RETURNS
We will compute the dividend adjusted rate of return for the I_DSW and I_GMX indexes based on the closing market values of the underlying listed firm observed between the third Friday in the liquidation month and the third Friday in the previous month. For these purposes, we will use closing prices and the number of shares outstanding as reported on the exchange on which the stock is listed (https://www.nasdaq.com/symbol or https://www.nyse.com/quote). For the S&P500 index, we will use the published index values on the third Friday in the liquidation month and the third Friday in the previous month
The index value for I_DSW will be computed as the sum of the market values (in $bn.) of the common stocks DIS, SPG, and WBA, where the values are computed as the product of the closing price and the closing number of shares outstanding. The index value for I_GMX will be computed as the sum of the market values (in $bn.) of the common stocks GM, MSFT, and XON, where the market values are computed as the product of the closing price and the closing number of shares outstanding.
The Dividend Adjusted Rate of Return is calculated as follows: First, we compute the index value on the third Friday of the prior month. Second, we compute the dividend adjusted index value on the third Friday of the liquidation month as the index value on the third Friday of the liquidation month plus total cash dividends with the ex-dividend dates after the third Friday of the prior month through the third Friday of the liquidation month. Finally, we compute the dividend adjusted index return by taking the dividend adjusted index value of the liquidation month, subtracting the index value of the prior month, and then dividing by the index value of the prior month. The S&P500 Index return is computed by taking the closing index value on the third Friday of the liquidation month, subtracting the closing index value on the third Friday of the prior month and then dividing by the prior month index value.
CONTRACT LIQUIDATIONS
Existing contracts will be liquidated by the IEM on the Monday after the third Friday of each month (see note 1 below). The exchange on which the stock is listed (https://www.nasdaq.com/symbol or https://www.nyse.com/quote)will be the official source of closing prices used in computing index values. The published closing value of the S&P 500 index will be the official source of the S&P Index closing 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.
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.
CONTRACT BUNDLES
For each contract month, fixed price contract bundles consisting of one share of each of the contract for the month can be purchased from or sold to the IEM system at any time. The price of each fixed price contract bundle is $1.00. Because exactly one of the month’s listed Index contracts will have the highest return, the total payoff from holding a contract bundle until the market closes is $1.00 (see note 2 below for ties).
To buy or sell fixed price contract bundles from the system, use the “Bundle Orders” option from the Trading Console. Select “Index_myy” (where “m” designates the contract month and “yy” designates the contract year) and the radio button “Buy at Fixed Price” from the Bundle Orders list to buy bundles of month m year yy contracts. Select “Index_myy” and the radio button “Sell at Fixed Price” to sell bundles of month m year yy contracts.
Bundles consisting of one share of each of the contracts for a particular month may also be purchased and sold at current aggregate market prices rather than the fixed price of $1.00. To buy a month m year yy market bundle at current ASK prices, use the “Bundle Orders” option as above but select “Index_myy” and the radio button “Buy at Market ASK Prices.” To sell a month m year yy contract bundle at current market BID prices, select “Index_myy” and the radio button “Sell at Market BID Prices.”
MARKET ACCESS
Only students enrolled in a course using this market will be given access rights to the Index Returns Market. Access to the contracts is achieved via the “Market Selection” pull down menu.
Funds in a trader’s cash account are fungible across markets so new investment deposits are not required. Additional investments up to the maximum of $500 can be made at any time. New traders can open accounts using the IEM Online Account Application page at https://iem.uiowa.edu. There is a one-time account activation fee of $5.00. Investments are limited to the range of $5.00 to $500.
Requests to withdraw funds may be submitted at any time by completing the IEM’s Online Withdrawal Request form. Additional information about requesting withdrawals is available at the IEM website at https://iemweb.biz.uiowa.edu/account-maintenance/withdrawals/.
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.