22: Hedging, Speculation, and Arbitrage

Slides:

Advertisements

Similar presentations

The Minimum Price Contract. Purpose of a Minimum Price Contract Minimum price contracts are one of the marketing tools available to producers to help.

Advertisements

Commodity Marketing (futures) Mathematical Applications in Agriculture.

Commodities Market Suppose that you are a farmer trying to decide what to plant in May. Harvest time is six months into the future. You are going to be.

VII: Futures 22: Hedges, Speculation, and Arbitrage.

FINC4101 Investment Analysis

VIII: Options 25: Options Strategies II. Chapter 25: Options Strategies © Oltheten & Waspi 2012 Collar  Hedging strategy on long shares  Long 10,000.

1 Futures Futures Markets Futures and Forward Trading Mechanism Speculation versus Hedging Futures Pricing Foreign Exchange, stock index, and Interest.

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved Futures Markets Chapter 22.

Options Strategies Commodity Marketing Activity Chapter #6.

VIII: Options 24: Options. Chapter 24: Options Computers Unlimited Windows Surface 14” Display 64GB White cover Office 2010 **** $1,999 **** Good Til.

14-1 Chapter 14 Futures Contracts Futures Contracts Points in time Delivery date Enter into contract Now 0 Short delivers commodity and receives.

1 Understanding Basis Definition Influence factors Basics of basis Patterns and trends.

Risk Management u Major thrust in agriculture u Change in government programs u Management is not avoidance –No risk, no reward –Too much risk and you.

Price Risk Management Jim Dunn Penn State University.

ECON 337: Agricultural Marketing Chad Hart Associate Professor Lee Schulz Assistant Professor

Types of Grain/Oilseed Contracts by: Joe Parcell PIE Agricultural Contracting.

FUTURES DEFINITION Futures (forward) contracts are agreements between two agents where one agrees to purchase and the other to sell (deliver) a given amount.

Lecture 5. The art in hedging is finding the exact number of contracts to make the net gain/loss = $ 0. This is called the Hedge Ratio # of Ks =

Selling Hedge with Futures. What is a Hedge?  A selling hedge involves taking a position in the futures market that is equal and opposite to the position.

Accounting Futures Contracts and Clearing A A. Chapter 21: Futures © Oltheten & Waspi 2012 Futures  Spot  immediate delivery and payment (settlement.

Intermediate Investments F3031 Spot Futures Parity How to value a futures contract (REVIEW) –Create two portfolios. In the first, buy the asset and then.

Finance 300 Financial Markets Lecture 25 © Professor J. Petry, Fall 2001

ECON 337: Agricultural Marketing Chad Hart Associate Professor Lee Schulz Assistant Professor

VII: Futures 22: Speculation. Chapter 22: Hedges, Speculation, and Arbitrage © Oltheten & Waspi 2012 Futures  Hedge  use futures to reduce risk on an.

Finance 300 Financial Markets Lecture 23 © Professor J. Petry, Fall 2002

VIII: Options 25: Options Strategies. Chapter 25: Options Strategies © Oltheten & Waspi 2012 Strategies  Shares Options Strategies combine one or more.

Lecture 4. Companies have risk Manufacturing Risk - variable costs Financial Risk - Interest rate changes Goal - Eliminate risk HOW? Hedging & Futures.

Corporate Financial Theory

Finance 300 Financial Markets Lecture 23 © Professor J. Petry, Fall 2001

Finance 300 Financial Markets Lecture 24 © Professor J. Petry, Fall 2002

Chapter 24 Risk Management: An Introduction to Financial Engineering Homework: 1,4,5 & 6.

Agro Products: Spread Strategies & Basis Pricing

Commodity Trading and Risk Management : Stress Testing Emmanuel Fragnière Haute École de Gestion de Genève Option Majeure en Commodity Trading 1 Haute.

Finance 300 Financial Markets Lecture 26 © Professor J. Petry, Fall 2001

Savings and Investment Unit Project Student Name.

PETROLEUM REFINERY MARGINS: Operational and Financial Strategies by Stephen M. Haik EMBA 762: Corporate Risk Management A. B. Freeman School of Business.

Intermeiate Investments F3031 Futures Markets: Futures and Forwards Futures and forwards can be used for two diverse reasons: –Hedging –Speculation Unlike.

PETROLEUM REFINERY MARGINS: Operational and Financial Strategies by Stephen M. Haik EMBA 762: Corporate Risk Management A. B. Freeman School of Business.

FUTURES: SPECULATION Types of speculators: –Short term Scalpers Day traders –Long term.

VII: Futures 23: Financial Futures. Chapter 23: Financial Futures © Oltheten & Waspi 2012 Derivative Securities  A derivative is a financial instrument.

Econ 337, Spring 2012 ECON 337: Agricultural Marketing Chad Hart Assistant Professor

Chap 15 - Hedging and Risk Farming & Risk (quantity, quality, price) Hedging transfer of risk to a counterparty (incomplete) similar to insurance cost.

1 Agribusiness Library Lesson : Hedging. 2 Objectives 1.Describe the hedging process, and examine the advantages and disadvantages of hedging. 2.Distinguish.

1 Farm and Risk Management Team Cooperative Extension – Ag and Natural Resources Dairy Price Risk Management: Session 5 – Hedging With Futures Last Update.

Using Futures Commodity Marketing Activity Chapter #4.

DATE POWER 2 INCOME JANUARY 100member X 25.00P2, FEBRUARY 200member X 25.00P5, MARCH 400member X 25.00P10, APRIL 800member.

Hedging & Futures Presented by Jonathan Truong. Agenda Futures Review What is Hedging What to Consider Wheat Example Gas Example.

Futures Futures are binding contracts that involve risk, and are time bound Unlike options, they are the obligation (not right) to buy or sell an underlying.

2011 Calendar Important Dates/Events/Homework. SunSatFriThursWedTuesMon January

Econ 339X, Spring 2011 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor John Lawrence Professor

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 22 Futures Markets.

Finance 300 Financial Markets Lecture 24 © Professor J. Petry, Fall 2001

CHAPTER 22 Investments Futures Markets Slides by Richard D. Johnson Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin.

Dairy Gross Margin Strategies Penn State Extension Educators Alan Zepp Risk Management Program Coordinator Center for Dairy Excellence.

Futures Markets CME Commodity Marketing Manual Chapter 2.

Commodity Challenge Chapter 10: Selling futures to hedge the value of grain held in storage.

USES OF OPTIONS: HEDGING Spot price risks: 1.Risk of spot price FALL –Person/firm committed to sell good (output) in the future 2.Risk of spot price RISE.

Savings and Investment Unit Project Student Name.

Commodity Marketing ~A Review

Understanding Agricultural Futures

Agricultural Marketing

VII: Futures 22: Arbitrage.

Agricultural Marketing

Commodity Marketing Strategies

Agricultural Marketing

Agricultural Marketing

Agricultural Marketing

Crop Marketing Winnebago County Grain Marketing Thompson, Iowa

2015 January February March April May June July August September

Presentation transcript:

22: Hedging, Speculation, and Arbitrage VII: Futures 22: Hedging, Speculation, and Arbitrage

Futures Hedge Speculate Arbitrage use futures to reduce risk on an existing position Speculate use futures to take on risk in the hope of making a profit Arbitrage Use the difference between spot and futures prices to generate risk-free profit

Hedge Identify the existing risk 50,000 bushels of soybeans growing in the fields The current price of $4.20/bushel can change before George can harvest & sell

Existing Risk: Long soybeans © Oltheten & Waspi 2012

Hedge An investment that offsets this risk Short soybeans Short Soybean futures

Hedge Strategy K K If soybean prices increase Long Spot J Short Futures L If soybean prices decrease Long Spot L Short Futures J K K

Offsetting futures risk November contracts deliver Hedge Strategy Use November Futures October ? harvest plant Spot risk Offsetting futures risk November contracts deliver Lift Hedge Set Hedge

Set the Hedge George sets the hedge in April Spot price: $4.20/bu Futures price: 431 Basis (spot-futures) = -11¢

November contracts deliver Set the Hedge Set the hedge in April October ? harvest $4.20 November contracts deliver Lift Hedge 431 -11¢

Set the Hedge Long Position (spot) Short Position (futures) George Q. Farmer Hedge is set Long Position (spot) Short Position (futures)

Long Position Short Position

Scenario 1: Textbook Hedge George harvests October 1 Spot price: $4.00/bu Futures price: 411 Basis (spot-futures) = -11¢

November contracts deliver Lift Hedge $4.00 $4.20 November contracts deliver 431 411 -11¢ -11¢ © Oltheten & Waspi 2012

Lift the Hedge George Q. Farmer Hedge is set Sell 10 November futures @ 431 [10*5,000*431 = $215,500] Margin: Hedge is lifted Buy 10 November futures @ 411 [10*5,000*411 = $205,500] Profit: Sell 50,000 soybeans spot @$4.00 Net Income:

Lift the Hedge Textbook Hedge $4.00 price: 411 Spot price: $4.20

Scenario 2: Not quite a Textbook Hedge George harvests October 1 Spot price: $5.00/bu Futures price: 508 Basis (spot-futures) = -8¢

November contracts deliver Lift the Hedge $5.00 $4.20 November contracts deliver 431 508 -11¢ -8¢ © Oltheten & Waspi 2012

Lift the Hedge George Q. Farmer Hedge is set Sell 10 November futures @ 431 [10*5,000*431 = $215,500] Margin: Hedge is lifted Buy 10 November futures @ 508 [10*5,000*508 = $254,000] Profit: Sell 50,000 soybeans spot @$5.00 Net Income:

Lift the Hedge Not quite a Textbook Hedge price: 508 Spot price: $4.20 $5.00 price: 508 price: 431

Hedge Once the hedge is set George trades his Price Risk for Basis Risk

Scenario 3: Not quite a Textbook Hedge George harvests October 1 Spot price: $1.00/bu Futures price: 105 Basis (spot-futures) = -5¢

November contracts deliver Lift Hedge $1.00 $4.20 November contracts deliver 431 105 -11¢ -5¢ © Oltheten & Waspi 2012

Lift the Hedge George Q. Farmer Hedge is set Sell 10 November futures @ 431 [10*5,000*431 = $215,500] Margin: Hedge is lifted Buy 10 November futures @ 105 [10*5,000*105 = $52,500] Profit: Sell 50,000 soybeans spot @$1.00 Net Income:

Lift the Hedge Trade Price Risk for Basis Risk $1.00 price: 105 Spot price: $4.20 $1.00 price: 105 price: 431

Hedge George also grows corn (10,000 bushels) Futures contracts defined as 5,000 bushels Cents per bushel Corn futures deliver March, May, July, September, & December.

Set the Hedge In April Spot corn is $2.00/bushel December corn futures trade at 195 Margin requirements at $400 and $300 per contract

December contracts deliver Set the Hedge $2.00 December contracts deliver 195 +5¢ © Oltheten & Waspi 2012

Set the Hedge George Q. Farmer Hedge is set

Lift the Hedge In October Spot corn is /bushel December corn futures trade at

December contracts deliver Set the Hedge $2.00 December contracts deliver 195 +5¢ © Oltheten & Waspi 2012

Lift the Hedge George Q. Farmer Hedge is set Sell 2 December futures @ 195 [2*5,000*195 = $19,500] Margin: Hedge is lifted Net Income:

November contracts deliver Set the Hedge $2.00 November contracts deliver 195 +5¢ © Oltheten & Waspi 2012

Futures II