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44 Terms
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1
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options
method to hedge commodity price risk
\-right to buy or sell a futures contract at a certain price by expiry date
2
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predetermined options elements
\-underlying asset
\-strike price
\-expiry date
3
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options expire..
prior to corresponding futures month it corresponds with
i.e august expiry for September futures position
4
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premium
only options variable, determined by bids and offers, paid by buyer and received by seller
5
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options participants
* call buyer (long) call seller (short)
* put buyer (long) put seller (short)
6
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buyers of options
\-option holders
\-risk is premium
\-has the right to take a futures position with no required margin
Has right to offset, exercise, or allow to expire
7
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sellers of options
\-writers/grantors
\-receive premiums> assume futures price change risk
\-has obligation until expiry date or when contract is offset
8
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put
right to sell at strike price until expiry date
9
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call
right to buy at strike price until expiry date
10
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strike price
price at which a call or put can be exercised
11
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intrinsic value
value of option if exercised
12
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option value
total of intrinsic and time value
13
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put option profitable when..
strike price>futures price
14
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call option profitable when..
strike price
15
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time value
remainder value of option premium once intrinsic value has been taken taken out
16
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time decay
\-decline in time value as fewer days remain until option expires
\-premium for an option will drop in time value as expiry gets closer
17
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intrinsic call value
futures price-call options strike price
18
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intrinsic put value
put option strike price-futures price
19
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time value
premium-intrinsic value
20
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in the money
\-has intrinsic value, option is profitable
put strike price>futures
calls strike price
21
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out of the money
\-option is not profitable and does not have intrinsic value
put strike price
call strike price>futures
22
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at the money
puts and calls strike price=futures prices
23
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option choices
\-exercise
\-let expire
\-offset prior to expiry
24
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under-filling
don’t forward contract 100% of expected product
25
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quality
discounts for lesser grades
26
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forward contract components
\-pricing
\-title transfer
\-delivery
\-settlement
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forward contract advantages
\-can establish favorable price for future delivery
\-protect against unfavorable basis movement
28
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forward contract disadvantages
\-border closes
\-forego upward market shifts
\-magnified production risks
29
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basis contract
basis is fixed is contract, along with date, quality, time, quantity
\-price locked in on a later date
30
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basis contract advantage
\-protects against increased transport costs
\-accounts for local supply and demand
\-storage costs- bank rates
\-handling fees-elevator fees
31
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forward priced contract
\-establishes price and basis
\-exchange rate can be source of issues
32
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forward basis contract
\-basis set, price tbd
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methods of price fall protection
\-short hedge
\-buy put option
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short hedge price fall protection
\-Sell=short
\-benefits from strengthening basis
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put option price fall protection
\-exercise put option if prices fall>gives you short futures position
\-offset position> short cash and long futures position
36
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option combinations price fall protection
basis contract+put
forward contract+call
37
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basis contract+put
\-price fall protection
\-set basis with contract
\-set strike price with put
\-prices fall, use
\-prices rise, allow to expire
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forward contract+call
\-price fall protection
\-product committed to price
\-call opens opportunity
\-when product is delivered and cash collected, we can also exercise option
\-prices increase> exercise option by buying futures and receiving hedge profit
\-prices decrease>protected by contract
39
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higher input cost production methods
\-long futures
\-Call option
40
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long futures input cost protection
\-buy=long
\-profit/loss from hedge offsets csh mkt losses
\-benefits from weakening basis
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call option input cost protection
\-buy call option
\-prices rise>exercise call for long futures
\-offset futures
42
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options combinations for input cost protection
\-basis contract+call
\-forward contract+put
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basis contract+call
\-input price rise protection
\-sets basis and then buys call
\-prices rise>exercise contract
\-prices fall>allow expiry
44
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forward contract+put
\-input price rise protection
\-sets price and basis then buys put
\-opens opportunity to profit from lower price
\-prices lower>exercise option and sell at lower price and make hedge profit
\-prices raise>locked in at original price