Top Banner

Click here to load reader

Introductory Pricing/Marketing Workshop for Grains, On-Line Introductory Pricing/Marketing Workshop for Grains, On-Line Review Breakeven Basis First four pricing tools Continue with

Mar 12, 2020

ReportDownload

Documents

others

  • (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

  • 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.

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

  • CBOT CORN Mason, MI

    Mon Price Chg Delivery Basis Cash

    Mar 14 445'2s 4'6 FEB 2014 -0.40 4.05

    Mar 14 445'2s 4'6 MAR 2014 -0.38 4.07

    Jul 14 455'0s 4'0 JUN 2014 -0.30 4.25

    Dec 14 459'6s 3'4 O/N 2014 -0.50 4.10

  • HEDGE (Hedge‐to‐Arrive)

    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

    (Futures Month) (Sell) Expected Basis

    Storage Costs

    Brokerage Costs

    Net Expected Price

  • BASIS CONTRACT (Futures Month) (Price) Less: Cash Price

    (Deliver Cash) Basis Contract ____________

    Prices Up Prices Down (Futures Month) (Price) (Price) Less: Basis Contract Equals Net Price Received

  • SELL CASH and BUY FUTURES

  • 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

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

  • I

    · .

    INSURANCE

    Substitution of a small but

    certain loss (insurance premium)

    for the possibility of. a large .

    uncertain loss.

    ""

    /'

    , .' t t, '

    ....\.~.

    '.

  • COMMODITY OPTIONS

    MARKET

    Market in which producers may

    purchase the "opportunity" but 'not the i= / ...j r_ "'}'\. 1...--1- ('-...., r ...", '.

    "obligation" to· sell' or buy a C6mmed·~

    ,at a certain price.

    "

    l ) I \

  • w w

    0 0

    - -

    a: a:

    a. a.

    (J) C

    ' C

    ' Z

    Z t-

    - -

    ~ ~ ~ .

    W ...I

    > ~

    ...I :::)

    ~ "

    a: w

    £D .

  • _...~, ..

    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

    - sell for higher price

    .If price is below $3.00

    - "collect on policy"

    .. ( I I J I'. . I J

  • -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

  • )

    PUT·' OPTION

    A contract that gives the ·holder

    the· right to sell at a specified price

    "T0 put it on them"

    t ." \ 1 \

  • z0- t-

    t-o. en

    0 a::

    z w

    ------

    CO >-

    ::Ja:: 0

    CO D

    ]W 0

    c .

    C :c

    w Z

    ...I ~ .

    >- 0

    0 w

    z >

    -:I: 0

    z 1-..........,

    en 0

    C .

    a: ( )

    i

    W

    i ~

    0 ,

    a. en

    i"i t-

    i _

    _ -.

    W :c

    :c (!'

    t- -cc·

  • ..~

    0 0

    . W

    I- J :

    .. J :

    I- S2

    (J) a:

    ..J W

    I- ..J

    : e -

    w I-

    z (J

    )·o o

    - I-

    C o:c

    z W

    :: «a:

    ..~« Z

    (!' t-

    O C

    oZ ,

    (J) Z

    a: ~

    (J w

    ~

    a.. z

    w Q

    :e l-

    I- a.. o

  • ·EXERCISE . ... OR

    -STRIKE PRICE .

    ·THE .SPECIFIED PRICE AT - WHICH THE OPTION

    PURCHASER MAY BUY OR

    SELL THE COMMODITY

    'A':::,'

    ) ) \ I I \ I I j i ~ I I I I ) I

  • enw >

    t% :

    W 1

    -. .::)

    :r:.- C

    ' l-

    I- e

    ·z ::)

    l- e

    - U

    . ~

    > 0

    ..I

    ..I

  • UJ::J:' I-

    Z ::J:

    Q o

    I- -

    D .

    ::J: 0

    3=w z

    ::I: 0

    '1 -

    D .

    LL ':::J

    0 W

    (J) I-

    I- c

    (::J :

    C CJ '-

    W a:

    ::J: 'I-

  • :E '

    ::) ,-':EW1:1:'0.Z o-,I-0.o

    w::)' •

    ..Jz· .

    - I - ~

    W O

    ~ w

    I:I:::J: ~I- W

    LL ::J:0

    . I-

    LLoW ~

    o ~

    _ W

    1:1: 0

    o .Z

    w <

    C ::J:I:I: I - ~

    I i'

    Z 1

    - -

    ,0 ~

    W W

    L L

    ::J: L

    L I-

    WZ-

  • .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

  • INTRINSIC VALUE .

    .'1'

    ,,;..if

    ., \

    f /'

    i

    i ::~ ",

    .i1i

    "POSITIVE" DIFFERENCE BETWEEN

    STRIKE PRICE AND UNDERLYING

    COMMODITY PRICE

    FOR A PUT - STRIKE PRICE EXCEEDS

    - FUTURES PRICE

    FOR A CALL - STRIKE PRICE BELOW

    FUTURES PRICE /

    /

    ~ '. , it T'

    .~

    :....... , ~. f·

    / I

    \

    JlJ".11'3: ' ~.' .. l~'\. !"." i~;~, "~~

    i~~~~).,.l I !

  • ":i7 rl,

    -

    •"?

    -, W

    W ,;

    ::) ::)

    ..J ..J

    c:e c:e

    w >

    > a:

    0 ~

    0 c:e

    > ••

    - -

    1-' W

    en w

    en -

    In Z

    Z Z

    :E

    l- t-

    l- I-

    w I

    W I

    ·z Z

    - i

    en z

    '>J:

    c -

    - ~:;

    .-;

    :J: ...---

    Z -

    0 W

    0

    en •

    z -

    , .

    0 ~

    I-

  • ""F i-4~i;-;'i,~~!f,~P'( , ;:".

    :j..

    TIME· VALUEi

    J

    PORTION OF OPTION pREMIUM

    RESULTING FROM LENGTH OF .TIME TO EXPIRATION

    USl»LLY T~ME VALUE DECREASES ;.'~~~'

    . WITH LENGTH OF TIME UNTIL EXPIRATION,

    !

    1· I .1 . I I i I

  • z«I-wenU.U.o

    W t

    l-e:( Z

    C o

    - -

    ::l I-

    0 Z

    a. -

    0 o

    ...J i=

    C '

    0 CiS

    Z I-

    0 i=

    cc 0-

    en w

    ..z -

    c x

    a: 0

    w 0

    i= z

    .z 0

    - e:(

    - 0

    ,

    :J b

    .~. w

    e : ( I -

    en a:

    o l-

    1 -.

    Zo()

  • '"

    "':'J. "

    .~.

    MONEY FLOWS Holding a soybean $7.00 putpurchasec

    for a $0. 15 premium

    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-; \

    $0.60

    ....0.15

    $0.45 ",·t',:

  • zo-~0-oZc:ewen-o£tW>I-::>LLWJ:

    - I-- Z-Zo-I--enoa..

  • ,~

    ;.~.

    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" . . "