Lecture28-2004 - Introduction to Options and Futures...

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Unformatted text preview: Introduction to Options and Futures Lecture XXVIII Futures and the hedge 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 2040. From a risk management standpoint farmers/decision makers could choose to forward market cattle in November on August 2, 2004. 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 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 85.44 Sell on 8/2 89.62 Buy on 11/17 88.90 Gain 0.72 Net Price 86.16 When the farmer markets cattle on November 18, 2004 he receives $85.44/cwt on the cash market. 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)....
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Lecture28-2004 - Introduction to Options and Futures...

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