Introduction to hedging agricultural commodities with options
"Producers of agricultural commodities regularly face price and production risks. Furthermore, increased global free trade and changes in domestic agricultural policy have increased these risks. As the variability of price increases the variability of revenue, producers are realizing the importance of risk management as a component of their management strategies. One means of reducing these risks is through the use of the commodity options exchange markets. Like using car insurance to hedge the potential costs of an accident, agricultural producers can use the commodity options markets to hedge the potential costs of commodity price volatility. As when gains from a car insurance claim might not exceed the cost of the cumulative sum of premiums, the gains from hedging agricultural commodities might not cover the costs of hedging. The primary objective of hedging is not to make money but to minimize price volatility. This guide provides an overview of hedging to aid producers in evaluating hedging opportunities. The options market is sometimes referred to as insurance. By hedging through the options market, an individual locks in the costs of hedging and then can lose at most only the cost of the option premium while having unlimited profit potential."--First page.
Archive version. For the most recent information see extension.missouri.edu.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 License.