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ECON 337: Agricultural Marketing

Learn about various option strategies and their impact on risk management in agricultural marketing. Explore put and call options, short and long hedges, and their potential returns.

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ECON 337: Agricultural Marketing

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  1. ECON 337: Agricultural Marketing Chad Hart Assistant Professor chart@iastate.edu 515-294-9911

  2. Going Short Sold Nov. 2012 Soybeans @ $12.22

  3. Going Long Bought Dec. 2012 Corn @ $5.84

  4. Put Option Graph Put Option Nov. 2012 Soybean @ $11.80 Strike Price = $11.80 Put Option Return = Max(0, Strike Price – Futures Price) – Premium – Commission Premium = $0.89 Commission = $0.01

  5. Call Option Graph Call Option Nov. 2012 Soybean @ $11.80 Strike Price = $11.80 Call Option Return = Max(0, Futures Price – Strike Price) – Premium – Commission Premium = $0.93 Commission = $0.01

  6. Short Hedge Expected Price • Expected price = Futures prices when I place the hedge + Expected basis at delivery – Broker commission

  7. Short Hedge Graph Net = Cash Price + Futures Return

  8. Long Hedge Expected Price • Expected price = Futures prices when I place the hedge + Expected basis at delivery + Broker commission

  9. Long Hedge Graph Net = Cash Price - Futures Return

  10. Short hedger Buy put option Floor Price = Strike Price + Basis – Premium – Commission At maturity If futures < strike, then Net Price = Floor Price If futures > strike, then Net Price = Cash – Premium – Commission Setting a Floor Price

  11. Put Option Graph Net = Cash Price + Put Option Return

  12. Long hedger Buy call option Ceiling Price = Strike Price + Basis + Premium + Commission At maturity If futures < strike, then Net Price = Cash + Premium + Commission If futures > strike, then Net Price = Ceiling Price Setting a Ceiling Price

  13. Call Option Graph Net = Cash Price – Call Option Return

  14. A hedger buys a $4.50 put option on Dec. 2012 corn. What is her expected minimum price? Expected minimum price = floor price = Strike price + basis – premium – commission = $4.50 - $0.25 - $0.125 - $0.01 = $4.115

  15. What is the least costly option strategy that will give her a $5.00 floor?

  16. What is the least costly option strategy that will give her a $5.00 floor?

  17. How does it compare to a simple futures hedge at current futures prices? Expected price = Futures price + basis – commission = $5.71 - $0.25 - $0.01 = $5.45

  18. A speculator wants to limit his risk but believes that corn prices will fall below $5 before harvest.

  19. Another speculator believes soybean prices will rise above $14 before harvest.

  20. Class web site: http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2012/ Lab in Heady 68

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