CHAP8_Presentation - An Application of Options Contract A...

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Chapter 8 1 An Application of Options Contract •A put gives the buyer of the option the right to sell a particular asset (including a futures contract) at the price designated in the put. call option gives the buyer the right to buy a particular asset (including a futures contract) at a specified price within a given time period. The buyer of options needs not exercise the right. The Let's Refuel America incentive puts a debit card in your hand when you purchase a select Chrysler (May 7, 2008 through July 31, 2008), guaranteeing that you will pay no more than $2.99 a gallon for three years and up to 12,000 miles per year. Q1: put or call option? Q2: specified price? Q3: with a given time period? Q4: do you pay for this option? Q5: if you were lured into this program, will you exercise the right now? Backwardation due to seasonal price fluctuation Basis, futures price, and cash price: Bt = Ft – Pt (p. 273 T& R) – Positive basis: premium relationship – Negative basis: price backwardation or discount relation In a perfect mkt, the prices for the futures contracts wil anticipate exactly the respective maturity months’ cash price Find the basis for period t1, t2, and the maturity month – For t1, is the basis + or –; what about t2; what about the basis at maturity? Price Month Seasonal price behavior for non-perishable goods new harvest harvest t1 t2 maturity Futures price Spatial Price Variations Chapter objectives: A. Examine economics of transfer costs B. Describe market boundaries C. Present spatial equilibrium model D. Examine international policies impact on prices Interregional trade within country International trade between countries
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Chapter 8 2 A. Transfer costs Cost of transferring a good from one region to another Principles underlying price differences between regions (assuming a competitive mkt structure with a homogeneous commodity) (1) If two regions trade with each other: price difference between regions equals transfer costs per unit of product (tc) P1 = P2 + tc Law of one price Why? Arbitrage drives prices together (2) If two regions do not trade with each other: price difference between regions less than or equal to tc Overall, in free trade, difference in prices between regions not larger than tc Agricultural tc large due to bulkiness and perishability tc = total transfer cost (fixed charge, transportation rate, distance)/Q Interregional price differences based on least cost method of moving product between points Least cost method will vary with distance transfer cost (per unit of product) Distance water truck rail a b c tc ( per unit) often assumed to increase linearly with distance. In most cases, transfer cost (per unit of product) rises as distance increases, but less than proportionately; another reason is total transfer contains a fixed components regardless of volume and distance, which is diluted over distance.
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This note was uploaded on 02/20/2009 for the course AEM 4150 taught by Professor Kaiser,h.m. during the Fall '07 term at Cornell University (Engineering School).

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CHAP8_Presentation - An Application of Options Contract A...

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