At harvest, you decide to buy 10 put option contracts on July corn to lock in a minimum price on 50,000 bushels of corn, while retaining the possibility of a higher price, should prices trend higher in the months ahead. You are expecting to make final delivery of the corn next spring, when the corn basis reaches 15 cents under the July contract.
I want you to complete the transaction next spring, under three different scenarios. Fill in the blanks in the T-diagram, showing the price you received in $/bushel or in gross sales revenues (price * quantity). Ignore ownership (storage) costs.
Scenario #1: Futures prices change little from harvest to spring
|
Date |
Cash |
Options |
Basis |
|
October |
Harvest 50,000 bushels of corn. Local elevator is bidding $5.15/ bu. The producer decides to hold grain in storage and buy put options on July futures. |
With July futures trading at $5.80/bu., the producer buys 10 contracts of 580 July put options, at a premium of 47 cents/bu. |
Minimum price established* (aka worst case scenario) is $5.80 + (-$.15) – $.47 – $.01 = $5.17/bu. * Assumes the basis reaches 15 cents under the July contract |
|
mid-June |
Sell 50,000 bushels of corn to the local elevator for $5.77/bu. |
With July corn futures at $6.00/bu., the 580 puts are worth less than 1 cent/bu. Let them expire. |
What is the basis in June? _____________ |
|
Results |
What did you receive in the cash market? $/bu. _____________ $total _____________ |
What was your gain or loss on the put options? $/bu. _____________ $total _____________ |
What final price did you receive for your corn? $/bu. _____________ $total _____________ |
Scenario #2: Futures prices rise $1/bu. from harvest to spring
|
Date |
Cash |
Futures |
Basis |
|
October |
Harvest 50,000 bushels of corn. Store grain buy put options on July futures. |
July futures at $5.80/bu., buy 10 contracts of 580 July put options, at a premium of $.47/bu. |
Minimum price established* (aka worst case scenario) is $5.80 + (-$.15) – $.47 – $.01 = $5.17/bu. |
|
mid-June |
Sell 50,000 bushels of corn to the local elevator for $6.57/bu. |
July corn futures at $6.80/bu., the 580 puts are worthless – let them expire. |
What is the basis in June? _____________ |
|
Results |
What did you receive in the cash market? $/bu. _____________ $total _____________ |
What was your gain or loss on the put options? $/bu. _____________ $total _____________ |
What final price did you receive for your corn? $/bu. _____________ $total _____________ |
Scenario #3: Futures prices fall $1/bu. from harvest to spring
|
Date |
Cash |
Futures |
Basis |
|
October |
Harvest 50,000 bushels of corn. Store grain buy put options on July futures. |
July futures at $5.80/bu., buy 10 contracts of 580 July put options, at a premium of $.47/bu. |
Minimum price established* (aka worst case scenario) is $5.80 + (-$.15) – $.47 – $.01 = $5.17/bu. |
|
June |
Sell 50,000 bushels of corn to the local elevator for $4.57/bu. |
July corn futures at $4.80/bu., the 580 puts are worth $1.00/bu. Sell them for a $1/bu. gain. |
What is the basis in June? _____________ |
|
Results |
What did you receive in the cash market? $/bu. _____________ $total _____________ |
What was your gain or loss on the put options? $/bu. _____________ $total _____________ |
What final price did you receive for your corn? $/bu. _____________ $total _____________ |
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