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.

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Presentation transcript:

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

AGEC 420, Lec 3810

AGEC 420, Lec 3811

AGEC 420, Lec 3812

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