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Ag Decision Maker Activity File A2-67
Option Tools to Reduce Price Risk
Name ________________________
Using File A2-67, answer the questions below.
1) New Crop Soybeans -- Put Option Strategy. It is May and I am considering buying a put option to provide price insurance for the soybean crop I just planted. November futures are $12.50 and the November at-the-money put option premium is 30 cents.
a) What will my projected net selling price be next fall if November futures price is trading for $11.50 and the expected harvest basis is 25 cents?
b) What will my projected net selling price be next fall if November futures price is trading for $13.50 and the expected harvest basis is 25 cents?
c) What will my actual net selling price be next fall if November futures price is trading for $11.50, the put option premium is $1.05, and the actual basis is 25 cents?
d) What will my actual net selling price be next fall if November futures are trading for $13.50, the put option premium is 5 cents, and the basis is 35 cents?
Ag Decision Maker Activity Continued… File A2-67
Option Tools to Reduce Price Risk
2) Old Crop Corn -- Put Option Strategy. It is harvest and due to a widespread drought July corn futures are trading for $3.40. I decide that I want to store my crop until next spring before I sell it but would like to buy some price insurance now. A July at-the-money put option is trading at 25 cents. The expected basis in June is 25 cents.
a) What is my projected "minimum selling price" if I buy the put option?
b) What is my projected net selling price in June if July futures price drops to $2.20?
c) What is my projected net selling price in June if July futures price drops to $3.00?
d) What is my projected net selling price in June if July futures price rises to $3.80?
e) What is my actual net selling price in June if July futures price drops to $2.50, the put premium rises to 95 cents, and the basis is 20 cents?
Ag Decision Maker Activity Continued… File A2-67
Option Tools to Reduce Price Risk
f) What is my actual net selling price in June if July futures price drops to $2.50, the put premium rises to 95 cents, the basis is 20 cents, and it costs me 25 cents to store the corn until June?
g) What is my actual net selling price in June if July futures price rises to $3.70, the put premium drops to 5 cents, and the actual June basis is 30 cents?
h) What is my actual net selling price in June if July futures price rises to $3.70, the put premium drops to 5 cents, the actual June basis is 30 cents, and it costs me 25 cents to store the corn until June?
i) What is my actual net selling price if I don't buy the option at harvest and store and sell my corn on the cash market in June. July futures price rises to $3.70, the actual June basis is 30 cents, and it costs me 25 cents to store the corn until June.
j) What is my actual net selling price if I don't buy the option at harvest and store and sell my corn on the cash market in June. July futures price crops to $2.50, the basis is 20 cents, and it costs me 25 cents to store the corn until June?
k) What is my actual net selling price if I sell the corn at harvest? July corn futures are trading for $3.40 and harvest cash price is $2.90.
Ag Decision Maker Activity Continued… File A2-67
Option Tools to Reduce Price Risk
3) New Crop Soybeans -- Put Option Strategy -- Reduced Yield. It is May and I have just planted my soybeans. Prices are as follows:
a) November futures price is $7.00
b) forward contract price for harvest delivery is $6.50
c) November at-the-money put premium is $.40
I am concerned that prices might be lower at harvest. So I am considering locking in a price for my soybeans now, but I am concerned what might happen if I have a poor crop. Compare the results of the following three marketing strategies:
a) price my soybeans with a forward cash contract.
b) buy price insurance against lower prices by buying a put option.
c) wait until harvest to sell my soybeans.
I am planning on a 40 bu. per acre soybean crop. What is my projected net price for each of the three strategies above? What is my projected net price if I produce only 20 bu. per acre?
Assume that at harvest November futures price is $5.50 and cash price is $5.00. Which strategy turns out best?
What if futures price is $9.00 and cash is $8.50? Which one is the highest risk?
Ag Decision Maker Activity Continued… File A2-67
Option Tools to Reduce Price Risk
4) Old Crop Corn -- Call Option Strategy. It is fall and I just harvested my corn crop. A widespread drought has pushed corn price upwards. I believe that prices will move even higher into spring but I don’t have any storage space available. Also, I am concerned about a major decline in corn prices. July futures price is $3.40 and cash price is $2.90. An at-the-money July call has a premium of $.20.
If I sell my corn and buy the call option:
a) What is my projected minimum selling price at harvest?
b) What is my projected net price if July futures price is $2.20 in June?
c) What is my projected net price if July futures price is $3.00 in June?
d) What is my projected net price if July futures price is $3.80 in June?
e) What is my actual net price if July futures price is $3.50 in June, cash price is $3.20, and the July option premium is $.15.
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. . . and justice for all
The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin, gender, religion, age, disability, political beliefs, sexual orientation, and marital or family status. (Not all prohibited bases apply to all programs.) Many materials can be made available in alternative formats for ADA clients. To file a complaint of discrimination, write USDA, Office of Civil Rights, Room 326-W, Whitten Building, 14th and Independence Avenue, SW, Washington, DC 20250-9410 or call 202-720-5964.
Issued in furtherance of Cooperative Extension work, Acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture. Jack M. Payne, director, Cooperative Extension Service, Iowa State University of Science and Technology, Ames, Iowa.
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