Risk management in agriculture : a guide to futures, options, and swaps

Risk Management for Agriculture addresses the issue of price risk as a management function versus a marketing function. Price risks impact not only the marketing of a product but the cash flow and the overall financial health of the business. The use of derivatives such as futures contracts, options contracts, and swaps need to be viewed as tools that can be used solely or in combinations to control price risk. Each of these derivatives and subsequent combinations is examined closely and comprehensively within the text. Price forecasting is addressed as well as fundamentals of futures hedging and options hedging. There is a complete glossary of terms at the end of the text to help reinforce the terms that are used throughout. Although price risk is the focus of the text, there is also a chapter devoted to the management of other agricultural risks. Students and professionals will benefit from this text that takes a comprehensive, management approach to price risk.

Preface	p. xiii
Chapter 1 Introduction	p. 1
Key Terms	p. 2
Overview	p. 2
Agricultural Risks	p. 3
Managing Agricultural Risks	p. 4
Production Risks	p. 4
Policy Risks	p. 5
Marketing Risks	p. 5
Structural Risks	p. 5
Price Risks	p. 6
Tools of the Trade	p. 6
Forward Contracts	p. 7
Futures Contracts	p. 7
Options Contracts	p. 8
Swap Contracts	p. 9
Using the Tools	p. 10
Hedging	p. 10
Corn Production Hedge Example	p. 11
Speculation and Income Generation	p. 12
The Role of Risk	p. 12
Questions	p. 13
Chapter 2 Fundamentals of Price Risk	p. 15
Key Terms	p. 16
Overview	p. 16
Uncertainty versus Risk	p. 16
Measuring Price Risk	p. 17
Probability and Random Variables	p. 17
Price Risk Management	p. 23
Acceptance	p. 23
Neutralizing	p. 24
Transference	p. 25
Psychology of Risk Management	p. 25
Attitudes toward Risk	p. 25
Developing a Risk and Mitigation Profile	p. 27
What are the risks?	p. 27
Can the risks be mitigated?	p. 27
How can the risks be mitigated?	p. 27
Costs and benefits?	p. 27
Do I want to mitigate the risks?	p. 27
A Final Word about Risk	p. 28
Questions	p. 28
Chapter 3 Price Forecasting	p. 29
Key Terms	p. 30
Overview	p. 30
The Two Big Mine Fields	p. 30
Efficient Market Hypothesis	p. 31
Inefficient Market Hypothesis	p. 31
Using the Efficient Market Hypothesis	p. 32
Using the Inefficient Market Hypothesis	p. 33
Fundamental Price Forecasting	p. 33
Supply	p. 33
Major Points Concerning Supply	p. 36
Demand	p. 36
Major Points Concerning Demand	p. 38
Putting Supply and Demand Together	p. 39
Perfect Market Model	p. 39
The Law of One Price	p. 42
Artificial Price Floors	p. 42
Supply and Demand Driven Prices	p. 43
Supply Driven	p. 44
Demand Driven	p. 44
Seasonal and Cyclic Movements	p. 44
Econometrics	p. 45
Technical Price Analysis	p. 48
Charting Analysis	p. 48
Chart Types	p. 49
Single Price Charts	p. 49
Bar Charts	p. 49
Point and Figure Charts	p. 49
Candlesticks	p. 51
Trends and Turning Points	p. 51
Mathematical Modeling	p. 54
Curve Fitting	p. 54
Moving Averages	p. 54
Oscillators	p. 55
A Final Word	p. 56
Questions	p. 56
Chapter 4 Markets, Exchanges, and Regulation	p. 57
Key Terms	p. 58
Overview	p. 58
Markets	p. 58
Economic Theory and Markets	p. 59
Perfectly Competitive Markets	p. 59
Not Perfectly Competitive Markets	p. 60
Using the Market Concepts and the Role of the Speculator	p. 63
Market Relationships	p. 63
Temporal	p. 63
Spatial	p. 65
Form	p. 65
Position Traders	p. 66
The Exchanges	p. 66
Chicago Board of Trade	p. 68
Chicago Mercantile Exchange	p. 68
New York Mercantile Exchange	p. 68
New York Board of Trade	p. 68
Minneapolis Grain Exchange	p. 69
Kansas City Board of Trade	p. 69
Winnipeg Commodity Exchange	p. 69
Others	p. 69
Regulating Groups	p. 71
Commodity Futures Trading Commission (CFTC)	p. 71
National Futures Association (NFA)	p. 72
Canadian Regulation	p. 72
Questions	p. 72
Chapter 5 Fundamentals of Futures Hedging	p. 73
Key Terms	p. 74
Overview	p. 74
Futures Contracts	p. 74
Standardization	p. 75
Leverage	p. 76
Those Nasty Margin Calls	p. 76
Concept of Counterbalance	p. 77
Only Two Types of Hedges	p. 78
The Role of Futures Contracts in Hedging	p. 79
Absolute Price Movements	p. 79
Relative Price Movements	p. 80
Basis	p. 81
General Rules and Effects of Hedging with Futures	p. 83
Perfect Hedges	p. 83
Imperfect Hedges	p. 84
Net Hedged Prices	p. 86
Using Futures in the Grains and Oilseed Markets	p. 87
Basis Factors	p. 87
Cost of Carry Model	p. 88
Basis and Cost of Carry	p. 89
Basis and the Cost of Transportation	p. 90
Grain and Oilseed Basis Model	p. 90
Production Hedge	p. 90
Wheat Producer Example	p. 91
The Decision to Over- or Under-Hedge	p. 93
Storage Hedge	p. 93
Grain Merchant Storage Hedge	p. 93
Forward Pricing Hedging	p. 94
Food Manufacturer Hedge	p. 94
Basis Traders and Basis Contracts	p. 95
Call Contracts	p. 96
Crush Hedges	p. 98
Soybean Crush	p. 98
Using Futures in the Livestock Industry	p. 99
Livestock Basis	p. 100
Production Hedges	p. 101
Hog Production Hedge	p. 102
Cow-Calf Operation	p. 102
Feedlot Hedge	p. 103
Processing Hedge	p. 105
Using Nonagricultural Futures in Agriculture	p. 106
Interest Rate Risk	p. 106
Interest Rate Hedging	p. 107
Foreign Currency Risk	p. 107
Foreign Exchange Hedging	p. 109
Synopsis	p. 110
Questions	p. 110
Chapter 6 Fundamentals of Options Hedging	p. 113
Key Terms	p. 114
Overview	p. 114
Option Basics	p. 115
The Insurance Concept	p. 115
Premium and Strike Prices	p. 115
Options Pricing: The Premium	p. 118
Options Pricing: The Greek Values	p. 122
Buying Puts and Calls	p. 123
Writing Puts and Calls	p. 125
Writing Puts	p. 126
Writing Calls	p. 128
A Note on Writing versus Buying Options	p. 131
Option Hedging	p. 132
Put Options Hedging	p. 132
Call Options Hedging	p. 133
Floors and Ceiling with Option Hedging	p. 134
Hedging to a Certain Price/Cost	p. 135
Target Price Hedging	p. 137
Target Cost Hedging	p. 138
Partial Coverage Hedging	p. 139
Option Multiple Hedging	p. 140
A Final Word on Deltas	p. 143
Synthetic Futures Hedging	p. 143
Options Hedges versus Futures Hedges	p. 146
Questions	p. 147
Chapter 7 Swaps	p. 149
Key Terms	p. 150
Overview	p. 150
Swap Basics	p. 150
Commodity Swaps	p. 151
Natural Gas Commodity Swap Example	p. 152
Agricultural Swaps	p. 153
Corn Marketing Swap	p. 153
Corn Production Swap	p. 154
A Final Note on Agricultural Swaps	p. 156
Interest Rate Swaps	p. 157
Fixed versus Variable Loan Swap Example	p. 157
A Closer Look at Counterparty A	p. 159
Currency Swaps	p. 159
A Final Word on Swaps	p. 160
Questions	p. 161
Chapter 8 Complex Derivatives	p. 163
Key Terms	p. 164
Overview	p. 164
Introduction	p. 164
The Role of Multiple Risks	p. 164
A Multiple Single Risk Farming Example	p. 165
A Farm with Cloistered Risks Example	p. 165
Financial Engineering	p. 168
Designing and Constructing Complex Derivatives	p. 168
A Quick Example of Abuse	p. 169
Combinations	p. 169
Stacked Derivative Example	p. 169
Cloistered Derivative Example	p. 172
The Power of the Risk and Mitigation Profile (RMP)	p. 176
Unwinding	p. 177
Risk Management Package #1	p. 177
Risk Management Package #2	p. 177
The Treasury as a Profit Center	p. 179
Feed Mill Treasury Example	p. 180
A Final Note about Complex Derivatives	p. 181
Questions	p. 182
Chapter 9 Managing Other Hedging Risks	p. 183
Key Terms	p. 184
Overview	p. 184
Compensating Balances	p. 184
Cross Hedging	p. 185
Hedging Ratios	p. 185
Supplemental Insurance Hedge	p. 186
Portfolio Hedging	p. 188
Weather Derivatives	p. 188
A Final Word on Hedging	p. 189
Questions	p. 189
Glossary	p. 191
Index	p. 203

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