1. AGEC 420, Lec 401 Agec 420 HW #8: Regression – Fri. May 3 HW #9: Options in TradeSim – Wed, May 8 HW #10 - ungraded Exam 3: Friday, May 3 - Review session, May 2, 7pm, WA 41 Today Time value Option ‘Delta’ Position diagrams

2. AGEC 420, Lec 402 Checking Account Initial balance($10 * 85) $850 Wheat trade margin-$175 Corn trade margin- $125 Withdrawals-$300 Balance in checking$550

3. AGEC 420, Lec 403 Margin Account Deposits ($175, $125) $300.00 Wheat trade (bot 2820, sold 2714)-$105.00 Commissions/Fees- $25.12 Corn trade (bot 2292, at 2180) -$112.50 Commissions/Fees- $25.11 Withdrawals -$267.73 Balance in margin account $32.27

4. AGEC 420, Lec 404 $$$ Checking$550.00 Margin$ 32.27 –Balance$582.27 (= $6.85/person)

5. AGEC 420, Lec 405 Markets CBOT: http://www.cbot.com/http://www.cbot.com/ CME: http://www.cme.com/http://www.cme.com/

6. AGEC 420, Lec 406 Aug’02 Cattle

7. AGEC 420, Lec 407 Options - review Call option: –right to buy the underlying futures contract –at the specified strike price Put option: –right to sell the futures at the strike price Reading Purcell & Koontz – Ch 7 (pp203-224) CBOT Publication – on web page

8. AGEC 420, Lec 408 Put – Call Parity

9. AGEC 420, Lec 409 Put – Call Parity

10. AGEC 420, Lec 4010 Time value Reflects the market’s expectation for an option to have additional intrinsic value

11. Time value - example

12. Time value of Puts

13. AGEC 420, Lec 4013 Time value Reflects the market’s expectation for an option to have additional intrinsic value Options farther in- or out-of-the –money have lower time value (lower probability of additional intrinsic value) “Time decay”: the decline in time value as time passes: Time decay is more rapid as expiration approaches.

14. AGEC 420, Lec 4014 Option Delta Option prices don’t change as quickly as futures prices

15. AGEC 420, Lec 4015 Delta – example with Puts

16. AGEC 420, Lec 4016 Calculating Option Delta Futures price change = +3¾ Option ChangeDelta 230 Put- 1½1½ / 3¾ = 0.4 240 Put- 2 1/8 2 1/8 / 3¾ = 0.56 250 Put- 2 3/8 2 3/8 / 3¾ = 0.63 260 Put- 2¾ 2¾ / 3¾ = 0.73

17. AGEC 420, Lec 4017 Delta – example with Calls

18. AGEC 420, Lec 4018 Values for Delta Delta = d option price / d futures price –varies between 0 and 1 OptionDelta (abs. value) Deep out-of-the-moneynear 0 Out-of-the money0 to 0.5 At-the-moneyapprox 0.5 In-the-money0.5 to 1.0 Deep in-the-moneynear 1.0

19. AGEC 420, Lec 4019 Position Diagrams Shows how net realized price (profit) changes as the futures price (at expiration) changes Vertical axis: net realized price (profit) Horizontal axis: futures price at expiration All examples are for Dec. Corn, assuming zero basis, and current futures at $2.50

20. Long Cash Net Price2.80 2.50 2.20 2.502.80 Futures Price Cash

21. Short Futures @ 2.50 Net Profit+30 0 -30 2.202.502.80 +20 +10 -10 -20 Futures Price Futures

22. Long Cash + Short Futures @ 2.50 Net Price 2.50 2.20 2.50 2.80 Cash Futures Hedge 2.80 2.70 2.60 2.40 2.30 2.20 Futures Hedge

23. AGEC 420, Lec 4023 Buy 2.50 Put for 10c Net Profit+30 0 -30 2.202.502.80 +20 +10 -10 -20

24. AGEC 420, Lec 4024 Buy 2.50 Put for 10c Net Profit+30 0 -30 2.202.502.80 +20 +10 -10 -20

25. AGEC 420, Lec 4025 Buy 2.50 Put for 10c Net Profit+30 0 -30 2.202.502.80 +20 +10 -10 -20

26. AGEC 420, Lec 4026 Buy 2.50 Put for 10c Net Profit +30 0 -30 2.202.502.80 +20 +10 -10 -20

27. AGEC 420, Lec 4027 Hedge with a 2.50 Put Net Price 280 250 220 2.202.502.80 270 260 240 230 Put Cash Hedge

28. AGEC 420, Lec 4028 Price Floor For a short hedger buying put options: Price Floor = Strike price – Premium + Basis

29. AGEC 420, Lec 4029 Sell 2.50 Put for 10c Net Profit +30 0 -30 2.202.502.80 +20 +10 -10 -20

30. AGEC 420, Lec 4030 Buy 2.50 Call for 10c Net Profit +30 0 -30 2.202.502.80 +20 +10 -10 -20

31. AGEC 420, Lec 4031 Sell 2.50 Call for 10c Net Profit +30 0 -30 2.202.502.80 +20 +10 -10 -20

32. AGEC 420, Lec 4032