Over‐the‐counter Derivatives and Price Risk Management in a Post‐tripartite Environment: The Case of Cattle and Hogs

Braga, Francesco S.

doi:10.1111/j.1744-7976.1996.tb04432.x

Cited by 4 publications

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“…For example, the Ontario Wheat Producers Marketing Board, the Ontario Corn Producer, the Canadian Wheat Board and other groups all provide risk management products to their clients, and most of these are subject to futures price and foreign exchange rate fluctuations . We also discuss the early experience with the Live Cattle Options pilot project (Braga 1996) and believe that the pricing methodology we have developed here can be used in that context as well as for option pricing on live hogs. Our adaptation to the basic quantos model to include basis risk is also important because it shows how the various components of an option on the cash price of a commodity can be incorporated into an options pricing framework.…”

Section: Resultsmentioning

confidence: 99%

“…First, because of Canada's geographic and competitive position relative to the U.S., U.S. markets heavily influence its local cash markets. Braga (1996) discusses several over-the-counter options sold in Canadian dollars but priced in U.S. dollars, which thus involves some exchange rate risk. These include the cattle options pilot program, which sold put options on live cattle.…”

Section: Introductionmentioning

confidence: 99%

“…The cattle options pilot project did not price basis risk. Using a similar structure, Saskatchewan offered a minimum price hog contract, written by CIBC-Wood Gundy, on the Canadian dollar value of Chicago Mercantile Exchange (CME) live hog futures (Braga 1996). In addition to this quantos value, a forward basis was added to the Canadian dollar futures floor to establish a minimum cash price.…”

Section: Introductionmentioning

confidence: 99%

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On the Pricing of Cross Currency Futures Options for Canadian Grains and Livestock

Turvey

Yin

2002

Canadian J Agri Economics

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This paper explores the problem of pricing an option on the cash commodity in Canadian dollars when the commodity is priced relative to a U.S. futures market. A general option pricing model is developed that separates out the value of a quantos risk and basis risk. The paper uses daily data for cattle, corn and soybeans in Ontario, and the model is employed to price the option on the cash commodity with basis risk and the option on a quantos, without basis risk. The relationship between the pricing model and over‐the‐counter options and market revenue insurance is also discussed. L'article examine le problème que pose l'établissement du prix d'une option sur le marché au comptant canadien des denrées de base quand le prix du produit en question doit être établi en fonction d'un marchéà terme américain. Les auteurs proposent un modèle général dans lequel on sépare la valeur du risque par quantos de celle du risque de base pour établir le prix des options. Ils utilisent pour cela le cours quotidien des bovins, du maïs et du soja en Ontario. Le modèle permet de calculer le prix d'une option sur le marché au comptant des denrées de base avec le risque de base et le prix de l'option sur un quantos, sans risque de base. Les auteurs examinent aussi les liens entre le modèle et les options au comptoir ainsi que les assurance‐revenu du marché.

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Section: Resultsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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On the Pricing of Cross Currency Futures Options for Canadian Grains and Livestock

Turvey

Yin

2002

Canadian J Agri Economics

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“…Quanto options research and its application in agricultural commodities are very limited. For instance, in Canada some over-the-counter (OTC) products offered to farmers were priced in Canadian dollars with the underlying priced in USD; however, those options did not consider basis risk (Braga, 1996). Accounting for basis risk, Turvey and Yin (2002) analyze the application of quanto options to agricultural commodities in Canada at several locations.…”

Section: Introductionmentioning

confidence: 99%

Cross market price support and agricultural development

Chiu

Turvey²

2014

The Journal of Risk Finance

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Purpose – This paper aims to develop a market-driven mechanism for commodity price insurance in developing countries lacking access to futures markets or other forms of hedging products. Design/methodology/approach – The model incorporates futures, exchange rate and local basis risk under the Black-Scholes framework to develop quanto (quantity adjusting option). When the domestic price of a commodity in a developing country is strongly correlated to the price in a futures market, price support premiums can be estimated. The authors use daily corn futures prices, exchange rate MXP/USD, and prices of corn and sorghum at several locations in Mexico. Findings – The authors calculated the price insurance premium at various local markets in Mexico for corn and sorghum. The results are consistent with those for the USA, showing that relative price premiums are similar. Research limitations/implications – The results provide a benchmark to estimate the net welfare effects of government programs for agricultural price support. Practical implications – The model shows that privately provided agricultural price insurance is feasible under certain conditions for developing countries without an established futures market. Originality/value – This paper provides market-based agricultural options in Mexico which contributes to the existing government price support program.

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The Microeconomics of Agricultural Price Risk

Boyd

Bellemare

2020

Annu. Rev. Resour. Econ.

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Much of neoclassical economics is concerned with prices—more specifically, with relative prices. Similarly, economists have studied behavior in the face of risk and uncertainty for at least a century, and risk and uncertainty are without a doubt a feature of economic life. It is thus puzzling that price risk—that is, unexpected departures from a mean price level, or price volatility—has received so little attention. In this review, we discuss the microeconomics of price risk. We begin by reviewing the theoretical literature, a great deal of which is concerned with the effects of unstable agricultural prices on the welfare of producers, consumers, and agricultural households. We then discuss the empirical literature on the effects of price risk on economic agents. We emphasize policy responses to agricultural price risk throughout, discussing price stabilization policies from both theoretical and empirical perspectives. Perhaps most importantly, we provide several suggestions for future research in the area of price risk given increasing risk on world agricultural markets due to both policy uncertainty and climate change. Expected final online publication date for the Annual Review of Resource Economics, Volume 12 is October 5, 2020. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

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Over‐the‐counter Derivatives and Price Risk Management in a Post‐tripartite Environment: The Case of Cattle and Hogs

Cited by 4 publications

References 0 publications

On the Pricing of Cross Currency Futures Options for Canadian Grains and Livestock

On the Pricing of Cross Currency Futures Options for Canadian Grains and Livestock

Cross market price support and agricultural development

The Microeconomics of Agricultural Price Risk

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