# Section III Advanced Pricing Tools. Chapter 14: Buying call options to establish a maximum price

Save this PDF as:

Size: px
Start display at page:

Download "Section III Advanced Pricing Tools. Chapter 14: Buying call options to establish a maximum price"

## Transcription

1 Section III Chapter 14: Buying call options to establish a maximum price Learning objectives Hedging with options Buying call options to establish a maximum price Delta and the hedge ratio Key terms Delta: A measure of how much an option price changes in relation to a change in the futures price, typically expressed as a percentage. Hedge ratio: The reciprocal of the delta (1/delta). There is a difference between hedging price risks with options instead of futures. Using futures, a hedger can fix a specific price, but they give up the opportunity to benefit from a favorable price move. By purchasing options, hedgers can fix a minimum (floor) or maximum (ceiling) price and retain the opportunity to profit from a favorable price move. For grain buyers (e.g. livestock producers), an alternative to a basic long hedge is buying call options to establish a maximum price on grain to be purchased. In this segment, we will explore the purchase of call options to establish a maximum price. Buying call options establishes a maximum price, sometimes called a ceiling price. Here s a simple equation to calculate a maximum price established by buying call options call strike price + expected basis + premium + fees = expected maximum price This is an expected price, based on the expected basis. The actual basis will probably be a little different from expectations. It is also important to remember that basis is often a negative number. 1

3 Futures Market \$4.60 call value + option premium paid = net futures + basis estimate = cash estimate \$ \$ \$4.79 \$ \$ \$4.79 \$ \$ \$4.79 \$ \$ \$4.79 \$ \$ \$4.79 \$ \$ \$4.39 \$ \$ \$3.99 \$ \$ \$3.59 \$ \$ \$3.19 Delta and the hedge ratio Delta is one of a handful of Greeks examined by options traders. Delta is how much an option price changes in relation to a one point move in the futures, typically expressed as a percentage. Knowing delta offers some interesting insights into option values. delta = change in option premium/change in futures price In general, at the money options have a delta close to 0.5, or 50%. Deep in the money options have a delta approaching 1, or 100%. Far out of the money options have a delta approaching 0. For example, if an option has a delta of 0.5, or 50%, this means that the option premium will move about ½ (50%) of the underlying futures price move (e.g., a 10 cent change in the futures prices will be met with about a 5 cents change in the option premium). Delta is useful in two different ways. First, delta provides a simple interpretation of the probability of an option expiring in the money. For example, a deep in the money option with a delta of.80, may be said to have an 80% chance of expiring in the money. An out of the money option with a delta of.15 could be said to have a 15% chance of expiring in the money. 3

4 The second use of delta is in calculating a hedge ratio. The hedge ratio is the reciprocal of the delta, and is critical to estimating the number of option contracts needed to reach a fully hedged position. hedge ratio = 1/Delta For example, if the delta of an at the money option is.5, then the hedge ratio is 2 (because 1/.5 = 2). In this case, two contracts of options are needed to hedge the full value of 5,000 bushels. One common pitfall in the use of options for hedging is a poor understanding of the relationship between futures prices and option premiums, as expressed by delta and the hedge ratio. This pitfall is illustrated by the livestock producer who buys call options that are far out of the money (i.e., 700 corn calls when the futures market is trading at \$4.50/bu.). Out of the money call options are much less expensive than options that are at or in the money. But if market prices (and corn costs) rise by \$1, low delta means that the value of call options will increase much less than \$1/bu., and fail to offset rising corn costs. Further reading Self Study Guide to Hedging with Grain and Oilseed Futures and Options (handbook), CME Group, April study guide to hedging with grain andoilseed futures and options.html Grain and Oilseed Futures and Options (brochure), CME Group, February and oilseed futures and options fact card.html 4

6 Scenario #2: Futures prices rise \$1/bu. from January to June Date Cash Futures Basis January You have enough corn in storage to meet the needs of your dairy operation through mid June. at \$4.40/bu., the producer buys 4 contracts of 440 July call options, at a premium of 35 cents/bu. Maximum price established* is \$ ( \$.12) + \$.35 + \$.01 = \$4.64/bu. * Assumes the basis reaches 12 cents under the July contract June Buy 20,000 bushels of corn in the local market for \$5.21/bu. With July corn futures at \$5.40/bu., the 440 calls are worth \$1.01/bu. Sell the calls. What is the basis in June? Results What did you receive in the cash market? What was your gain or loss on the put options? What final price did you receive for your corn? 6

7 Scenario #3: Futures prices fall \$1/bu. from January to June Date Cash Futures Basis October You have enough corn in storage to meet the needs of your dairy operation through mid June. at \$4.40/bu., the producer buys 4 contracts of 440 July call options, at a premium of 35 cents/bu. Maximum price established* is \$ ( \$.12) + \$.35 + \$.01 = \$4.64/bu. * Assumes the basis reaches 12 cents under the July contract June Buy 20,000 bushels of corn in the local market for \$3.31/bu. With July corn futures at \$3.40/bu., the 440 calls have lost all value. Let them expire. What is the basis in June? Results What did you receive in the cash market? What was your gain or loss on the put options? What final price did you receive for your corn? 7

### Hedging: To buy or sell a futures contract on a commodity exchange as a temporary substitute for an intended later transaction in the cash market.

Section I Learning objectives Register for Commodity Challenge and join an open game Understanding your challenge Ground rules for trading in Commodity Challenge Illustrate a simple hedge with futures

### Section III Advanced Pricing Tools

Section III Learning objectives The appeal of options Puts vs. calls Understanding premiums Recognizing if an option is in the money, at the money or out of the money Key terms Call option: The right,

### Commodity Pricing Software

Commodity Pricing Software The main objective of this software is to provide farmers with an objective viewpoint of their potential risk and returns from selling or buying commodities while hedging their

### Chapter Five: Risk Management and Commodity Markets

Chapter Five: Risk Management and Commodity Markets All business firms face risk; agricultural businesses more than most. Temperature and precipitation are largely beyond anyone s control, yet these factors

### Managing Feed and Milk Price Risk: Futures Markets and Insurance Alternatives

Managing Feed and Milk Price Risk: Futures Markets and Insurance Alternatives Dillon M. Feuz Department of Applied Economics Utah State University 3530 Old Main Hill Logan, UT 84322-3530 435-797-2296 dillon.feuz@usu.edu

### EXAMINING FUTURES AND OPTIONS

EXAMINING FUTURES AND OPTIONS TABLE OF 130 Grain Exchange Building 400 South 4th Street Minneapolis, MN 55415 www.mgex.com mgex@mgex.com 800.827.4746 612.321.7101 Fax: 612.339.1155 Acknowledgements We

### Using Futures Markets to Manage Price Risk for Feeder Cattle: Advanced Strategies (AEC 2013-03) March 2013

Using Futures Markets to Manage Price Risk for Feeder Cattle: Advanced Strategies (AEC 2013-03) March 2013 Kenny Burdine 1 Introduction: Price volatility in feeder cattle markets has greatly increased

### WHAT ARE OPTIONS OPTIONS TRADING

OPTIONS TRADING WHAT ARE OPTIONS Options are openly traded contracts that give the buyer a right to a futures position at a specific price within a specified time period Designed as more of a protective

### Commodity Futures and Options

Understanding Commodity Futures and Options for Producers of Livestock and Livestock Products CIS 1100 The Authors Larry D. Makus, C. Wilson Gray and Neil R. Rimbey* Introduction Risk associated with an

### Milk Hedging Strategies Utilizing Futures & Options

Milk Hedging Strategies Utilizing Futures & Options A Basic Understanding of hedging and forward pricing scenarios Utilizing both futures & options traded at the Chicago Mercantile Exchange focusing on

### Commodity Futures and Options

Understanding CIS 1089 Commodity Futures and Options Larry D. Makus and Paul E. Patterson for Grain Marketing The Authors: L.D. Makus Professor, Department of Agricultural Economics and Rural Sociology,

### Commodity Options as Price Insurance for Cattlemen

Managing for Today s Cattle Market and Beyond Commodity Options as Price Insurance for Cattlemen By John C. McKissick, The University of Georgia Most cattlemen are familiar with insurance, insuring their

### Hedging With Options 101

Hedging With Options 101 An online tutorial by Christopher B. Swift Definition of a Futures Contract A futures contract is an agreement between two people, one agrees to make delivery (seller) and one

### General Information Series

General Information Series 1 Agricultural Futures for the Beginner Describes various applications of futures contracts for those new to futures markets. Different trading examples for hedgers and speculators

### Hedging strategies aim to reduce price risk

April 2014 INSIGHTS Hedging strategies aim to reduce price risk AgriThought AgriBank provides financial solutions to meet the needs of production agriculture in America s heartland. We feature our research

### Principles of Hedging with Futures

MARKETING & UTILIZATION Cooperative Extension Service Purdue University West Lafayette, IN 47907 NCH-47 Principles of Hedging with Futures Chris Hurt, Purdue University Robert N. Wisner, Iowa State University

### Using Futures Markets to Manage Price Risk for Feeder Cattle (AEC 2013-01) February 2013

Using Futures Markets to Manage Price Risk for Feeder Cattle (AEC 2013-01) February 2013 Kenny Burdine 1 Introduction: Price volatility in feeder cattle markets has greatly increased since 2007. While

### CBOT Soybean Crush. Reference Guide

CBOT Soybean Crush Reference Guide Introduction In the soybean industry, the term crush refers both to a physical process as well as a value calculation. The physical crush is the process of converting

### What is Grain Merchandising, Hedging and Basis Trading?

Grain Merchandising What is Grain Merchandising, Hedging and Basis Trading? Grain merchandising describes the process of buying and selling grain. Agribusiness firms that merchandise grain include grain

### 2010 Risk and Profit Conference Breakout Session Presenters. 9. Marketing Grain Using a Storage Hedge

Orlen Grunewald 2010 Risk and Profit Conference Breakout Session Presenters 9. Marketing Grain Using a Storage Hedge Orlen Grunewald is a professor in the Department of Agricultural

### Introduction to Futures Markets

Agricultural Commodity Marketing: Futures, Options, Insurance Introduction to Futures Markets By: Dillon M. Feuz Utah State University Funding and Support Provided by: Fact Sheets Definition of Marketing

### CME Dairy Markets. USDA Dairy Industry Advisory Committee June 3, 2010. Paul E. Peterson Director, Commodity Research & Product Development

CME Dairy Markets USDA Dairy Industry Advisory Committee June 3, 2010 Paul E. Peterson Director, Commodity Research & Product Development Brief History of CME Group Began as Chicago Butter & Egg Board

### Introduction to Margin Management. Commodity & Ingredient Hedging, LLC

Introduction to Margin Management Commodity & Ingredient Hedging, LLC www.cihedging.com 312-596-7755 What is a Margin? The concept of a profit margin is not new. Revenues minus expenses equal the profit

### Grain Marketing 101. University of Maryland Extension

Grain Marketing 101 Jenny Rhodes Shannon Dill John Hall Extension Educators, Agriculture & Natural Resources Marketing terminology CBOT futures Basis Contracts Forward Contract Hedge to Arrive Basis Contract

### Derivative Users Traders of derivatives can be categorized as hedgers, speculators, or arbitrageurs.

OPTIONS THEORY Introduction The Financial Manager must be knowledgeable about derivatives in order to manage the price risk inherent in financial transactions. Price risk refers to the possibility of loss

### Introduction to Options. Commodity & Ingredient Hedging, LLC www.cihedging.com 312-596-7755

Introduction to Options Commodity & Ingredient Hedging, LLC www.cihedging.com 312-596-7755 Options on Futures: Price Protection & Opportunity Copyright 2009 Commodity & Ingredient Hedging, LLC 2 Option

### Using Futures, Options or LRP Insurance to Manage Feeder Cattle Price Risk

Using Futures, Options or LRP Insurance to Manage Feeder Cattle Price Risk Dillon M. Feuz - Utah State University and John P. Hewlett University of Wyoming Understanding Risk In Agricultural Prices Wyoming

### Option Basics: A Crash Course in Option Mechanics

1 chapter # 1 Option Basics: A Crash Course in Option Mechanics The concept of options has been around for a long time. Ancient Romans, Greeks, and Phoenicians traded options based on outgoing cargoes

### CME Commodity Products. Trading Options on CME Random Length Lumber Futures

CME Commodity Products Trading Options on CME Random Length Lumber Futures Global Leadership in the Financial Marketplace CME is the largest and most diverse financial exchange in the world for trading

### INTRODUCTION TO COTTON FUTURES Blake K. Bennett Extension Economist/Management Texas Cooperative Extension, The Texas A&M University System

INTRODUCTION TO COTTON FUTURES Blake K. Bennett Extension Economist/Management Texas Cooperative Extension, The Texas A&M University System Introduction For well over a century, industry representatives

### BEAR: A person who believes that the price of a particular security or the market as a whole will go lower.

Trading Terms ARBITRAGE: The simultaneous purchase and sale of identical or equivalent financial instruments in order to benefit from a discrepancy in their price relationship. More generally, it refers

### Hedging Foreign Exchange Rate Risk with CME FX Futures Canadian Dollar vs. U.S. Dollar

Hedging Foreign Exchange Rate Risk with CME FX Futures Canadian Dollar vs. U.S. Dollar CME FX futures provide agricultural producers with the liquid, efficient tools to hedge against exchange rate risk

### CROP REVENUE COVERAGE INSURANCE PROVIDES ADDITIONAL RISK MANAGEMENT WHEAT ALTERNATIVES 1

Presented at the 1997 Missouri Commercial Agriculture Crop Institute CROP REVENUE COVERAGE INSURANCE PROVIDES ADDITIONAL RISK MANAGEMENT WHEAT ALTERNATIVES 1 Presented by: Art Barnaby Managing Risk With

### Basic Option Trading Strategies

Basic Option Trading Strategies What is an option? Definition Option an intangible right bought or sold by a trader to control 100 shares of a security; it expires on a specific date in the future. The

### Definitions of Marketing Terms

E-472 RM2-32.0 11-08 Risk Management Definitions of Marketing Terms Dean McCorkle and Kevin Dhuyvetter* Cash Market Cash marketing basis the difference between a cash price and a futures price of a particular

### Craig Thomas MSU-Extension Educator Dairy Farm Business Management and Milk Marketing

Livestock Gross Margin Insurance for Dairy Craig Thomas MSU-Extension Educator Dairy Farm Business Management and Milk Marketing Livestock Gross Margin Insurance for Dairy (LGM-Dairy) is a subsidized insurance

### An Introduction to Cattle Feeding Spreads

An Introduction to Cattle Feeding Spreads JANUARY 2014 INTRODUCTION Through the use of various combinations of CME Group derivative products, market participants have the ability to simulate the financial

### INTRODUCTION TO OPTIONS MARKETS QUESTIONS

INTRODUCTION TO OPTIONS MARKETS QUESTIONS 1. What is the difference between a put option and a call option? 2. What is the difference between an American option and a European option? 3. Why does an option

### Questions and Answers

MA3245 Financial Mathematics I Suggested Solutions of Tutorial 1 (Semester 2/03-04) Questions and Answers 1. What is the difference between entering into a long forward contract when the forward price

### CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS

INSTRUCTOR S MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS. On April, the spot price of the British pound was \$.86 and the price of the June futures

### In today s farming. Using Futures Markets to Manage Price Risk in Feeder Cattle Operations. Introduction W 320A

W 320A Using Futures Markets to Manage Price Risk in Feeder Cattle Operations Andrew P. Griffith Assistant Professor & Extension Economist- Livestock University of Tennessee R. Curt Lacy Associate Professor

### The basic concepts of grain price options are

Grain Price Options Basics File A2-66 December 2009 www.extension.iastate.edu/agdm The basic concepts of grain price options are discussed below. Methods of using grain price options to market grain are

### Risks Associated With Marketing

Risks Associated With Marketing November, 2013 Federal Reserve Bank of Chicago Market Risk (Price Risk) is Always Present Two Components Solution Futures Price Risk Basis Risk (Cash price relative to futures

### Commodity products. Self-Study Guide to Hedging with Grain and Oilseed Futures and Options

Commodity products Self-Study Guide to Hedging with Grain and Oilseed Futures and Options In a world of increasing volatility, CME Group is where the world comes to manage risk across all major asset classes

### Hedging Milk with BFP Futures and Options

Curriculum Guide I. Goals and Objectives A. Gain an understanding of milk price seasonality. B. earn about basis and how to track it over time. C. earn how to hedge future milk sales with BFP futures and

### COMMODITIES. CBOT Soybeans vs. DCE Soybean Meal and Soybean Oil Crush Spread

COMMODITIES CBOT vs. DCE and Soybean Oil Spread JULY 2015 CBOT SOYBEANS VS. DCE SOYBEAN MEAL AND SOYBEAN OIL CRUSH SPREAD A key component in the soybean market is what is known as the crush spread. are

### Options on Beans For People Who Don t Know Beans About Options

Options on Beans For People Who Don t Know Beans About Options Remember when things were simple? When a call was something you got when you were in the bathtub? When premium was what you put in your car?

### The basic concepts of grain price options

Grain Price Options Basics File A2-66 January, 1996 The basic concepts of grain price options are discussed below. Methods of using grain price options to market grain are presented in: Options Tools to

### Understanding New Generation Grain Contracts November, 2005

Understanding New Generation Grain Contracts November, 2005 Developed by: Steven D. Johnson, Ph.D. Farm & Ag Business Management Field Specialist Introduction Grain marketing and related cash and futures

### FAQ. (Continued on page 2) An Investment Advisory Firm

FAQ An Investment Advisory Firm What is QASH Flow Advantage? It is a time-tested model that includes three strategic components: A portfolio of carefully selected Exchange-Traded Funds (ETFs) for diversification

### AGRICULTURAL PRODUCTS. Introduction to Hedging with Dairy Futures and Options

AGRICULTURAL PRODUCTS Introduction to Hedging with Dairy Futures and Options TABLE OF CONTENTS 1. INTRODUCTION 1 2. WHAT ARE DAIRY FUTURES AND OPTIONS? 3 3. FINANCIAL INTEGRITY OF THE DAIRY FUTURES MARKET

### Agricultural Commodity Marketing: Futures, Options, Insurance

Agricultural Commodity Marketing: Futures, Options, Insurance By: Dillon M. Feuz Utah State University Funding and Support Provided by: On-Line Workshop Outline A series of 12 lectures with slides Accompanying

### J. Gaspar: Adapted from Jeff Madura, International Financial Management

Chapter5 Currency Derivatives J. Gaspar: Adapted from Jeff Madura, International Financial Management 5. 1 Currency Derivatives Currency derivatives are financial instruments whose prices are determined

### FINANCIALLY SETTLED, AGRICULTURAL INDEXES

FINANCIALLY SETTLED, AGRICULTURAL INDEXES N ow there s a new way to trade and manage price risk for MGEX agricultural index futures and options. From pricing advantages in options, to the ability to hedge

### BUSM 411: Derivatives and Fixed Income

BUSM 411: Derivatives and Fixed Income 2. Forwards, Options, and Hedging This lecture covers the basic derivatives contracts: forwards (and futures), and call and put options. These basic contracts are

### Figure S9.1 Profit from long position in Problem 9.9

Problem 9.9 Suppose that a European call option to buy a share for \$100.00 costs \$5.00 and is held until maturity. Under what circumstances will the holder of the option make a profit? Under what circumstances

### INTRODUCTION TO COTTON OPTIONS Blake K. Bennett Extension Economist/Management Texas Cooperative Extension, The Texas A&M University System

INTRODUCTION TO COTTON OPTIONS Blake K. Bennett Extension Economist/Management Texas Cooperative Extension, The Texas A&M University System INTRODUCTION For well over a century, industry representatives

### Iowa Farm Outlook. New Data Indicates Lower Retail Meat Prices

Iowa Farm Outlook November 1, 2002 Ames, Iowa Econ. Info. 1849 New Data Indicates Lower Retail Meat Prices As part of the Mandatory Price Reporting legislation in 1999 Congress directed USDA to develop

### Yield Protection Crop Insurance will have the same Yield Coverage as Revenue Protection, but RP is Expected to be the Preferred Choice (Updated) 1

Disclaimer: This web page is designed to aid farmers with their marketing and risk management decisions. The risk of loss in trading futures, options, forward contracts, and hedge-to-arrive can be substantial

### Fin 3710 Investment Analysis Professor Rui Yao CHAPTER 14: OPTIONS MARKETS

HW 6 Fin 3710 Investment Analysis Professor Rui Yao CHAPTER 14: OPTIONS MARKETS 4. Cost Payoff Profit Call option, X = 85 3.82 5.00 +1.18 Put option, X = 85 0.15 0.00-0.15 Call option, X = 90 0.40 0.00-0.40

### The Farmer s Grain Marketing Guide

January 2004 ER04-01 The Farmer s Grain Marketing Guide Carl L. German Extension Specialist, Marketing 208 Townsend Hall University of Delaware Newark, Delaware 19717-1303 clgerman@udel.edu phone: 302-831-1317

### CHAPTER 20: OPTIONS MARKETS: INTRODUCTION

CHAPTER 20: OPTIONS MARKETS: INTRODUCTION PROBLEM SETS 1. Options provide numerous opportunities to modify the risk profile of a portfolio. The simplest example of an option strategy that increases risk

### Before we discuss a Call Option in detail we give some Option Terminology:

Call and Put Options As you possibly have learned, the holder of a forward contract is obliged to trade at maturity. Unless the position is closed before maturity the holder must take possession of the

### A Blueprint To Profitable Options Trading

You re In The Right Place If A Blueprint To Profitable Options Trading A Beginner s Guide To Success 1. You know you SHOULD be using options in your investing but you re not sure what to do. 2. You re

### Commodity products. Self-Study Guide to Hedging with Livestock Futures and Options

Commodity products Self-Study Guide to Hedging with Livestock Futures and Options In a world of increasing volatility, CME Group is where the world comes to manage risk across all major asset classes interest

### CHOOSING AMONG CROP INSURANCE PRODUCTS

CHOOSING AMONG CROP INSURANCE PRODUCTS Gary Schnitkey Department of Agricultural and Consumer Economics University of Illinois at Urbana-Champaign Email: schnitke@uiuc.edu, Phone: (217) 244-9595 August

### Basic Terminology For Understanding Grain Options, G85-768-A

G85-768-A Basic Terminology For Understanding Grain Options This publication, the first of six NebGuides on agricultural grain options, defines many of the terms commonly used in futures trading. Lynn

### How to Collect a 162% Cash on Cash Return

How to Collect a 162% Cash on Cash Return Today we are going to explore one of the most profitable, low-risk income strategies I ve come across in my 27 years of trading. This income strategy produced

### Navigating the complex world of options

Navigating the complex world of options Brian Grete Sr. Market Analyst, Pro Farmer The Basics of Options: Calls vs. Puts Call options: An option that gives the buyer the right, but not the obligation,

### Advance Trading Inc Merchandising Seminar. The Warehouse Industry

Advance Trading Inc Merchandising Seminar The Warehouse Industry How does the marketplace assure the consumer an adequate supply of grain all year? Consumption January-December October Production How does

### FINANCIAL ENGINEERING CLUB TRADING 201

FINANCIAL ENGINEERING CLUB TRADING 201 STOCK PRICING It s all about volatility Volatility is the measure of how much a stock moves The implied volatility (IV) of a stock represents a 1 standard deviation

### ADVANCED COTTON FUTURES AND OPTIONS STRATEGIES

ADVANCED COTTON FUTURES AND OPTIONS STRATEGIES Blake K. Bennett Extension Economist/Management Texas Cooperative Extension, The Texas A&M University System INTRODUCTION Cotton producers have used futures

### Determining Option Price. Target Price, Strike Price, Option Premium!

Determining Option Price Target Price, Strike Price, Option Premium! Decide on Strategy Direction, magnitude, risk! Up! Buy Calls! or! Sell Puts! or! Combo! Direction! Down! Buy Puts! or! Sell Calls! or!

### Reading: Chapter 19. 7. Swaps

Reading: Chapter 19 Chap. 19. Commodities and Financial Futures 1. The mechanics of investing in futures 2. Leverage 3. Hedging 4. The selection of commodity futures contracts 5. The pricing of futures

### CME Commodity Trading Manual

CME Commodity Trading Manual To the Reader... This book was originally designed as a guide for teachers of high school agricultural education programs. It contained supplemental materials and study pages,

### Price, Yield and Enterprise Revenue Risk Management Analysis Using Combo Insurance Plans, Futures and/or Options Markets

Price, Yield and Enterprise Revenue Risk Management Analysis Using Combo Insurance Plans, Futures and/or Options Markets Authors: Duane Griffith, Montana State University, Extension Farm Management Specialist

### Hedging with Futures and Options: Supplementary Material. Global Financial Management

Hedging with Futures and Options: Supplementary Material Global Financial Management Fuqua School of Business Duke University 1 Hedging Stock Market Risk: S&P500 Futures Contract A futures contract on

### Index futures contract features. Contract features. MGEX Agricultural Index. MGEX Agricultural Index Futures and Options

MGEX Agricultural Index Futures and Options 1 MGEX Agricultural Index Futures and Options Five agricultural indexes futures and options contracts: National Corn Index (NCI) National Soybean Index (NSI)

### Common Crop Insurance Policy (CCIP) DR. G. A. ART BARNABY, JR. Kansas State University 4B Agricultural Consultants

Common Crop Insurance Policy (CCIP) DR. G. A. ART BARNABY, JR. Kansas State University 4B Agricultural Consultants Phone: 785-532-1515 EMAIL: barnaby@ksu.edu Check out our WEB page at http://www.agmanager.info

### RISK MANAGEMENT STRATEGIES FOR CATTLEMEN

RISK MANAGEMENT STRATEGIES FOR CATTLEMEN Kurtis Ward President/CEO www.kisokc.com As a former agricultural loan officer, I witnessed first-hand the effects that the Dairy Herd Buyout Program had on the

### OPTIONS MARKETS AND VALUATIONS (CHAPTERS 16 & 17)

OPTIONS MARKETS AND VALUATIONS (CHAPTERS 16 & 17) WHAT ARE OPTIONS? Derivative securities whose values are derived from the values of the underlying securities. Stock options quotations from WSJ. A call

Swing Trade Warrior Chapter 1. Introduction to swing trading and how to understand and use options How does Swing Trading Work? The idea behind swing trading is to capitalize on short term moves of stocks

### An Introduction to Trading Dairy Futures and Options

An Introduction to Trading Dairy Futures and Options Global Leadership in the Financial Marketplace CME Group is an entity formed by the merger of CME and CBOT. We bring more than 250 years of expertise

### CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS

CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Explain the basic differences between the operation of a currency

### Basis The Cash Futures Relationship

Agricultural Commodity Marketing: Futures, Options, Insurance Basis The Cash Futures Relationship By: Dillon M. Feuz Utah State University Funding and Support Provided by: Fact Sheets Knowing and Managing

### Chapter 15 OPTIONS ON MONEY MARKET FUTURES

Page 218 The information in this chapter was last updated in 1993. Since the money market evolves very rapidly, recent developments may have superseded some of the content of this chapter. Chapter 15 OPTIONS

### CME Commodity Products. An Introduction to Trading CME Dairy Futures and Options

CME Commodity Products An Introduction to Trading CME Dairy Futures and Options Global Leadership in the Financial Marketplace CME is the largest and most diverse financial exchange in the world for trading

### THE UNDAMENTALS AND ECHNIQUES RADING OMMODITY PREADS. c s

c s THE UNDAMENTALS AND ECHNIQUES OF RADING OMMODITY PREADS The purpose of this booklet is to give you a better understanding of various aspects of spread trading in the futures market. Center for Futures

### CME Options on Futures

CME Education Series CME Options on Futures The Basics Table of Contents SECTION PAGE 1 VOCABULARY 2 2 PRICING FUNDAMENTALS 4 3 ARITHMETIC 6 4 IMPORTANT CONCEPTS 8 5 BASIC STRATEGIES 9 6 REVIEW QUESTIONS

### Contingent Claims: A stock option that is a derivative security whose value is contingent on the price of the stock.

Futures and Options Note 1 Basic Definitions: Derivative Security: A security whose value depends on the worth of other basic underlying variables. E.G. Futures, Options, Forward Contracts, Swaps. A derivative

### Volatility as an indicator of Supply and Demand for the Option. the price of a stock expressed as a decimal or percentage.

Option Greeks - Evaluating Option Price Sensitivity to: Price Changes to the Stock Time to Expiration Alterations in Interest Rates Volatility as an indicator of Supply and Demand for the Option Different

### Chapter 1 - Introduction

Chapter 1 - Introduction Derivative securities Futures contracts Forward contracts Futures and forward markets Comparison of futures and forward contracts Options contracts Options markets Comparison of

### Underlier Filters Category Data Field Description

Price//Capitalization Market Capitalization The market price of an entire company, calculated by multiplying the number of shares outstanding by the price per share. Market Capitalization is not applicable

### Lecture 4: Derivatives

Lecture 4: Derivatives School of Mathematics Introduction to Financial Mathematics, 2015 Lecture 4 1 Financial Derivatives 2 uropean Call and Put Options 3 Payoff Diagrams, Short Selling and Profit Derivatives

### Finance 350: Problem Set 6 Alternative Solutions

Finance 350: Problem Set 6 Alternative Solutions Note: Where appropriate, the final answer for each problem is given in bold italics for those not interested in the discussion of the solution. I. Formulas

### How futures markets work. Convergence between cash and futures

How futures markets work Convergence between cash and futures Futures markets Futures markets have existed over 150 years as a means for managing price risk Futures contracts are purchase and sales agreements

### Week 13 Introduction to the Greeks and Portfolio Management:

Week 13 Introduction to the Greeks and Portfolio Management: Hull, Ch. 17; Poitras, Ch.9: I, IIA, IIB, III. 1 Introduction to the Greeks and Portfolio Management Objective: To explain how derivative portfolios