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

Econ 337, Spring 2012 Going Short Sold Nov $12.22

Econ 337, Spring 2012 Going Long Bought Dec $5.84

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

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

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

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

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

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

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

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

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

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

Econ 337, Spring 2012 A hedger buys a $4.50 put option on Dec corn. What is her expected minimum price? Expected minimum price = floor price = Strike price + basis – premium – commission = $ $ $ $0.01 = $4.115

Econ 337, Spring 2012 What is the least costly option strategy that will give her a $5.00 floor? OptionsStrike Price PremiumFloor Price Put Put Put Put Put Put Put Put Put Put OptionsStrike Price PremiumFloor Price Put Put Put Put Put Put Put Put Put Put

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

Econ 337, Spring 2012 How does it compare to a simple futures hedge at current futures prices? Expected price = Futures price + basis – commission = $ $ $0.01 = $5.45

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

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

Econ 337, Spring 2012 Class web site: Spring2012/ Lab in Heady 68