Lecture28-2004 - Lecture XXVIII Introduction to Options and...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Lecture XXVIII Introduction to Options and Futures I. Futures and the hedge A. Most undergraduate courses on agricultural marketing include a section on futures markets and hedging. However, to discuss options and option pricing, we will briefly introduce the use of option markets. B. Futures markets such as the Chicago Board of Trade allow for the trading (purchase and sale) of commodities to be delivered at some future data. On November 18, 2004 the future price for December 2004 corn was 204’0. 1. From a risk management standpoint farmers/decision makers could choose to forward market cattle in November on August 2, 2004. 2. Forward marketing using futures markets is typically referred to as hedging. To forward market cattle on August 2, 2004 for sale on November 18, 2004 the farmer would sell a contract of fat cattle on August 2. Referring to Table 1, the price of fat cattle in the August 2 for January-February delivery is $89.62/cwt. Table 1. Futures Prices for Fat Cattle Date Open High Low Close 11/17/2004 88.05 89.10 87.95 88.90 8/2/2004 89.30 90.02 89.25 89.62 6/17/2004 88.45 88.75 88.15 88.60 Transactions Cash Price 85.44Sell on 8/2 89.62 Buy on 11/17 88.90 Gain 0.72 Net Price 86.16 3. When the farmer markets cattle on November 18, 2004 he receives $85.44/cwt on the cash market. 4. In addition, he has gained $0.72/cwt on the futures market (the price that he buys back the futures contract for is $88.90/cwt). 5. If the farmer had attempted to market his cattle on June 17, 2004 instead the farmer would loose $0.30/cwt on each contract resulting in a $85.14/cwt price.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 07/15/2011 for the course AEB 6182 taught by Professor Weldon during the Fall '08 term at University of Florida.

Page1 / 5

Lecture28-2004 - Lecture XXVIII Introduction to Options and...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online