(Lecture notes for the Week 2 Second Session, Wednesday, 2/19/14) Introductory Pricing/Marketing Workshop for Grains, On-Line

Transcription

1 (Lecture notes for the Week 2 Second Session, Wednesday, 2/19/14) Introductory Pricing/Marketing Workshop for Grains, On-Line Review Breakeven Basis First four pricing tools Continue with With three more pricing tools New Begin Commodity Options

2 Breakeven Basis, when do you lift a Hedge? Break-Even Basis Line helps us answer two questions. 1) Should we hedge? a. Basis needs to be weaker than the B-E Basis Line to consider hedging. 2) When to get out of/lift the hedge? a. When basis strengthens to B-E Basis, consider lifting hedge. 3) When a hedge would no longer pay, consider lifting yours.

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5 3) When a hedge would no longer pay, consider lifting yours.

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7 CBOT CORN Mason, MI Mon Price Chg Delivery Basis Cash Mar '2s 4'6 FEB Mar '2s 4'6 MAR Jul '0s 4'0 JUN Dec '6s 3'4 O/N

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14 HEDGE (Hedge to Arrive) (Futures Month) (Sell) Expected Basis Storage Costs Brokerage Costs Net Expected Price Prices Up Prices Down (Futures Month) (Buy) (Buy) Actual Basis Cash Price Plus Net Returns from Futures Sell and Buy Less: Storage Cost Brokerage Cost Equal Net Returns Equals Net Price Received

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18 BASIS CONTRACT (Futures Month) (Price) Less: Cash Price Basis Contract (Deliver Cash) Prices Up Prices Down (Futures Month) (Price) (Price) Less: Basis Contract Equals Net Price Received

19 SELL CASH and BUY FUTURES

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21 SELL CASH and BUY FUTURES (Futures Month) (Buy) Cash Price (Sell) Actual Basis Prices Up Prices Down (Futures Month) (Sell) (Sell) Cash Price Plus Net Returns from Futures Buy and Sell Less: Brokerage Cost Equals Net Price Received Actual Basis

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23 Problem, the basis is predictable, prices are generally not

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28 . INSURANCE...\.~. Substitution of a small but certain loss (insurance premium) for the possibility of. a large. uncertain loss. "" '. I,.' t t, ' /'

29 COMMODITY OPTIONS MARKET Market in which producers may purchase the "opportunity" but 'not the i=/ \ j ('-..., r_ r...", "'}' '. "obligation" to sell' or buy a C6mmed ~,at a certain price. " l ) I \

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31 _... ~,.. Want rigl't,t to sell corn for S3.00/bu. Purchase right in options market by a remium If price when ready to sell is above S3.00.If price is below $ "collect on policy" - sell for higher price.. ( I I J I '.. I J

32 -0' _0.CALL OPTION. --A contract that gives the holder the right to b\.ly_ at a specifiedprice _... "..-".. "To call- from them"o -! I \ -/ ) ). \ -I

33 PUT ' OPTION A contract that gives the holder the right to sell at a specified price "T0 put it on them" ) t." \ 1 \

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36 EXERCISE.... OR 'A':::,' -STRIKE PRICE. THE.SPECIFIED PRICE AT - WHICH THE OPTION PURCHASER MAY BUY OR SELL THE COMMODITY ) ) \ I I \ I I j i ~ I I I I ) I

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40 .FAC'TORS AFFE~CTING,...PREMIUMS - DIFFERENCE BETWEEN THE.. STRIKE... t~ - PRICE OF THE OPTION AND THE PRICE.... 0F THE UNDERLYING COMMODITY - LENGTH.OF TIME TO EXPIRATION \ I I ) I J J I

41 ., \.'1',,;..if INTRINSIC VALUE. i i ::~ ",.i1i "POSITIVE" DIFFERENCE BETWEEN STRIKE PRICE AND UNDERLYING COMMODITY PRICE ~ '., it T'.~ FOR A PUT - STRIKE PRICE EXCEEDS - FUTURES PRICE \ :..., ~. f /I FOR A CALL - STRIKE PRICE BELOW FUTURES PRICE / / f /' JlJ ".11'3: ' ~.'.. l~ '\.!". " i~;~, "~~ i~~~~).,.l I!

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43 ""F i-4~i;-;'i,~~!f,~p'(, ;:". :j.. TIME VALUEi PORTION OF OPTION premium RESULTING FROM LENGTH OF.TIME TO EXPIRATION USl»LLY T~ME VALUE DECREASES ;.'~~~'. WITH LENGTH OF TIME UNTIL EXPIRATION,! J 1 I.1. I I i I

44 z «I w en U. U. o Z W l- e:( C o - - ::l I- 0 Z a. - 0 o...j i= C' 0 CiS Z I- 0 i= cc 0 en w..z - x c a: 0 w 0 i= z.z 0 e:( - 0, :J b.~. we:(ien a: o l- 1-. Z o() t

45 MONEY FLOWS Holding a soybean $7.00 putpurchasec for a $0.15 premium "':'J. " '".~. OFFSET Current futures price is $6.50. Sell option at a $0.60 premium.result Offset premium received - Original premium paid Net returns l.l-; \ $ $0.45 ", t',:

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47 MONEY. FLOWS..Holding a soybean $7.00 put purchased for a $0.15 premium..'....current futures price' is $,6.50 Receive a short (sell) futures market.position at $7.00".. "<. ~ ". \.\.<> Buy futures at $ ~. '1" " '> " ~::,~ ;.~. RESULT Futures gain - Original premium paid. Net Returns $0. ijldji " ', ~O~1~&J '$0::35."'.