AGEC 420, Lec 381 Agec 420 HW #7: Chart - due today HW #8: Regression – Fri. May 3 HW #9: Options in TradeSim Monday 29 th – David Frey, Kansas Wheat Commission Exam 3: Friday, May 3 - review session?? Options – cont. Position diagrams

AGEC 420, Lec 382 Markets CBOT: CME:

AGEC 420, Lec 383 Options - review Call option: –right to buy the underlying futures contract –at the specified strike price Put option: –right to sell the futures at the strike price Reading Purcell & Koontz – Ch 7 CBOT Publication – on web page

AGEC 420, Lec 384 Options – Notes Calls and puts are separate contracts – not opposite sides of the same transaction Options usually expire before the futures delivery month begins

AGEC 420, Lec 385 Contract Expiration Futures –no trades in the last 7 business days of the delivery month –1st delivery day - 1st business day of delivery month Options –expire 5 business days before delivery begins

AGEC 420, Lec 386 Hedging with Put Options Short Hedger –Wants protection from a price decline –Take a position in futures/options that will make $ if prices decline –Buy a put option If price fall – put becomes more valuable - position makes $ If prices rise – put expires worthless Price is not locked-in (upside potential remains – but at a cost)

AGEC 420, Lec 387 Hedging with Put Options - like buying insurance –Pay a premium to protect against possible loss –Once premium is paid – no further obligation –If price fall – you’re covered (because the put option becomes more valuable) –If price rises – forget about it!

AGEC 420, Lec 388 Sample Option Prices Dec corn – – To illustrate –Put-call parity –Time value

AGEC 420, Lec 389 Position Diagram –shows how net realized price (profit) changes as the futures price changes Vertical axis: net realized price (profit) Horizontal axis: futures price

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AGEC 420, Lec 3813 Long Cash Net Price Futures Price

AGEC 420, Lec 3814 Short 2.50 Net Profit Futures Price

AGEC 420, Lec 3815 Long Cash + Short 2.50 Net Price Cash Futures Hedge