Short hedge example with options
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"This guide describes how to place an output (short) hedge in the options market to reduce the price risk associated with selling an output produced in your business. A short hedge in the options market is referred to as the purchasing of a put option. For example, assume that John, a corn producer, knows he will be selling grain at harvest three months from now. Currently, the local corn price is $3.70 per bushel, but John believes that the price may drop during the next few months. By knowing the cost of production, John knows that $3.70 per bushel will allow for a satisfactory profit. What can he do to reduce his risk from a potential drop in prices? John cannot sell and deliver corn now because the crop is still maturing, but he could enter the options market and partially offset any loss in value (decrease in price) with a gain in option value." -- first page
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This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 License.
Provided for historical documentation only. Check Missouri Extension and Agricultural Experiment Station websites for current information.
Provided for historical documentation only. Check Missouri Extension and Agricultural Experiment Station websites for current information.