1. Econ 337, Spring 2012 ECON 337: Agricultural Marketing Chad Hart Assistant Professor chart@iastate.edu 515-294-9911

2. Econ 337, Spring 2012 Going Short Sold Nov. 2012 Soybeans @ $12.22

3. Econ 337, Spring 2012 Going Long Bought Dec. 2012 Corn @ $5.84

4. Econ 337, Spring 2012 Put Option Graph Put Option Nov. 2012 Soybean @ $11.80 Premium = $0.89 Commission = $0.01 Strike Price = $11.80 Put Option Return = Max(0, Strike Price – Futures Price) – Premium – Commission

5. Econ 337, Spring 2012 Call Option Graph Call Option Nov. 2012 Soybean @ $11.80 Premium = $0.93 Commission = $0.01 Strike Price = $11.80 Call Option Return = Max(0, Futures Price – Strike Price) – Premium – Commission

6. Econ 337, Spring 2012 Short Hedge Expected Price  Expected price = Futures prices when I place the hedge + Expected basis at delivery – Broker commission

7. Econ 337, Spring 2012 Short Hedge Graph Net = Cash Price + Futures Return

8. Econ 337, Spring 2012 Long Hedge Expected Price  Expected price = Futures prices when I place the hedge + Expected basis at delivery + Broker commission

9. Econ 337, Spring 2012 Long Hedge Graph Net = Cash Price - Futures Return

10. Econ 337, Spring 2012 Setting a Floor Price  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

11. Econ 337, Spring 2012 Put Option Graph Net = Cash Price + Put Option Return

12. Econ 337, Spring 2012 Setting a Ceiling Price  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

13. Econ 337, Spring 2012 Call Option Graph Net = Cash Price – Call Option Return

14. Econ 337, Spring 2012 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. Econ 337, Spring 2012 What is the least costly option strategy that will give her a $5.00 floor? OptionsStrike Price PremiumFloor Price Put4.500.134.11500 Put4.600.154.19250 Put4.700.174.26750 Put4.800.204.34000 Put4.900.234.41000 Put5.000.264.47750 Put5.100.304.54000 Put5.200.344.60000 Put5.300.384.65625 Put5.400.434.71000 OptionsStrike Price PremiumFloor Price Put5.500.484.76125 Put5.600.534.81000 Put5.700.594.85500 Put5.800.644.89750 Put5.900.704.93750 Put6.000.774.97500 Put6.100.835.01000 Put6.200.905.04250 Put6.300.975.07250 Put6.401.045.10125

16. Econ 337, Spring 2012 What is the least costly option strategy that will give her a $5.00 floor?

17. Econ 337, Spring 2012 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. Econ 337, Spring 2012 A speculator wants to limit his risk but believes that corn prices will fall below $5 before harvest.

19. Econ 337, Spring 2012 Another speculator believes soybean prices will rise above $14 before harvest.

20. Econ 337, Spring 2012 Class web site: http://www.econ.iastate.edu/~chart/Classes/econ337/ Spring2012/ Lab in Heady 68