Hedging Against Falling Soybeans Prices using Soybeans Futures

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Contents

Hedging Against Rising Soybeans Prices using Soybeans Futures

Businesses that need to buy significant quantities of soybeans can hedge against rising soybeans price by taking up a position in the soybeans futures market.

These companies can employ what is known as a long hedge to secure a purchase price for a supply of soybeans that they will require sometime in the future.

To implement the long hedge, enough soybeans futures are to be purchased to cover the quantity of soybeans required by the business operator.

Soybeans Futures Long Hedge Example

A soybean processing company will need to procure 500,000 bushels of soybeans in 3 months’ time. The prevailing spot price for soybeans is USD 9.6900/bu while the price of soybeans futures for delivery in 3 months’ time is USD 9.7000/bu. To hedge against a rise in soybeans price, the soybean processing company decided to lock in a future purchase price of USD 9.7000/bu by taking a long position in an appropriate number of CBOT Soybeans futures contracts. With each CBOT Soybeans futures contract covering 5000 bushels of soybeans, the soybean processing company will be required to go long 100 futures contracts to implement the hedge.

The effect of putting in place the hedge should guarantee that the soybean processing company will be able to purchase the 500,000 bushels of soybeans at USD 9.7000/bu for a total amount of USD 4,850,000. Let’s see how this is achieved by looking at scenarios in which the price of soybeans makes a significant move either upwards or downwards by delivery date.

Scenario #1: Soybeans Spot Price Rose by 10% to USD 10.66/bu on Delivery Date

With the increase in soybeans price to USD 10.66/bu, the soybean processing company will now have to pay USD 5,329,500 for the 500,000 bushels of soybeans. However, the increased purchase price will be offset by the gains in the futures market.

By delivery date, the soybeans futures price will have converged with the soybeans spot price and will be equal to USD 10.66/bu. As the long futures position was entered at a lower price of USD 9.7000/bu, it will have gained USD 10.66 – USD 9.7000 = USD 0.9590 per bushel. With 100 contracts covering a total of 500,000 bushels of soybeans, the total gain from the long futures position is USD 479,500.

In the end, the higher purchase price is offset by the gain in the soybeans futures market, resulting in a net payment amount of USD 5,329,500 – USD 479,500 = USD 4,850,000. This amount is equivalent to the amount payable when buying the 500,000 bushels of soybeans at USD 9.7000/bu.

Scenario #2: Soybeans Spot Price Fell by 10% to USD 8.7210/bu on Delivery Date

With the spot price having fallen to USD 8.7210/bu, the soybean processing company will only need to pay USD 4,360,500 for the soybeans. However, the loss in the futures market will offset any savings made.

Again, by delivery date, the soybeans futures price will have converged with the soybeans spot price and will be equal to USD 8.7210/bu. As the long futures position was entered at USD 9.7000/bu, it will have lost USD 9.7000 – USD 8.7210 = USD 0.9790 per bushel. With 100 contracts covering a total of 500,000 bushels, the total loss from the long futures position is USD 489,500

Ultimately, the savings realised from the reduced purchase price for the commodity will be offset by the loss in the soybeans futures market and the net amount payable will be USD 4,360,500 + USD 489,500 = USD 4,850,000. Once again, this amount is equivalent to buying 500,000 bushels of soybeans at USD 9.7000/bu.

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Risk/Reward Tradeoff

As you can see from the above examples, the downside of the long hedge is that the soybeans buyer would have been better off without the hedge if the price of the commodity fell.

An alternative way of hedging against rising soybeans prices while still be able to benefit from a fall in soybeans price is to buy soybeans call options.

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If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

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Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

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Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

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In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Hedging Against Falling Soybeans Prices using Soybeans Futures

Soybeans producers can hedge against falling soybeans price by taking up a position in the soybeans futures market.

Soybeans producers can employ what is known as a short hedge to lock in a future selling price for an ongoing production of soybeans that is only ready for sale sometime in the future.

To implement the short hedge, soybeans producers sell (short) enough soybeans futures contracts in the futures market to cover the quantity of soybeans to be produced.

Soybeans Futures Short Hedge Example

A soybean farmer has just entered into a contract to sell 500,000 bushels of soybeans, to be delivered in 3 months’ time. The sale price is agreed by both parties to be based on the market price of soybeans on the day of delivery. At the time of signing the agreement, spot price for soybeans is USD 9.6900/bu while the price of soybeans futures for delivery in 3 months’ time is USD 9.7000/bu.

To lock in the selling price at USD 9.7000/bu, the soybean farmer can enter a short position in an appropriate number of CBOT Soybeans futures contracts. With each CBOT Soybeans futures contract covering 5,000 bushels of soybeans, the soybean farmer will be required to short 100 futures contracts.

The effect of putting in place the hedge should guarantee that the soybean farmer will be able to sell the 500,000 bushels of soybeans at USD 9.7000/bu for a total amount of USD 4,850,000. Let’s see how this is achieved by looking at scenarios in which the price of soybeans makes a significant move either upwards or downwards by delivery date.

Scenario #1: Soybeans Spot Price Fell by 10% to USD 8.7210/bu on Delivery Date

As per the sales contract, the soybean farmer will have to sell the soybeans at only USD 8.7210/bu, resulting in a net sales proceeds of USD 4,360,500.

By delivery date, the soybeans futures price will have converged with the soybeans spot price and will be equal to USD 8.7210/bu. As the short futures position was entered at USD 9.7000/bu, it will have gained USD 9.7000 – USD 8.7210 = USD 0.9790 per bushel. With 100 contracts covering a total of 500000 bushels, the total gain from the short futures position is USD 489,500

Together, the gain in the soybeans futures market and the amount realised from the sales contract will total USD 489,500 + USD 4,360,500 = USD 4,850,000. This amount is equivalent to selling 500,000 bushels of soybeans at USD 9.7000/bu.

Scenario #2: Soybeans Spot Price Rose by 10% to USD 10.66/bu on Delivery Date

With the increase in soybeans price to USD 10.66/bu, the soybeans producer will be able to sell the 500,000 bushels of soybeans for a higher net sales proceeds of USD 5,329,500.

However, as the short futures position was entered at a lower price of USD 9.7000/bu, it will have lost USD 10.66 – USD 9.7000 = USD 0.9590 per bushel. With 100 contracts covering a total of 500,000 bushels of soybeans, the total loss from the short futures position is USD 479,500.

In the end, the higher sales proceeds is offset by the loss in the soybeans futures market, resulting in a net proceeds of USD 5,329,500 – USD 479,500 = USD 4,850,000. Again, this is the same amount that would be received by selling 500,000 bushels of soybeans at USD 9.7000/bu.

Risk/Reward Tradeoff

As can be seen from the above examples, the downside of the short hedge is that the soybeans seller would have been better off without the hedge if the price of the commodity went up.

An alternative way of hedging against falling soybeans prices while still be able to benefit from a rise in soybeans price is to buy soybeans put options.

Learn More About Soybeans Futures & Options Trading

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Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Hedging Against Falling Corn Prices using Corn Futures

Corn producers can hedge against falling corn price by taking up a position in the corn futures market.

Corn producers can employ what is known as a short hedge to lock in a future selling price for an ongoing production of corn that is only ready for sale sometime in the future.

To implement the short hedge, corn producers sell (short) enough corn futures contracts in the futures market to cover the quantity of corn to be produced.

Corn Futures Short Hedge Example

A corn grower has just entered into a contract to sell 5,000 tonnes of corn, to be delivered in 3 months’ time. The sale price is agreed by both parties to be based on the market price of corn on the day of delivery. At the time of signing the agreement, spot price for corn is EUR 129.25/ton while the price of corn futures for delivery in 3 months’ time is EUR 130.00/ton.

To lock in the selling price at EUR 130.00/ton, the corn grower can enter a short position in an appropriate number of Euronext Corn futures contracts. With each Euronext Corn futures contract covering 50 tonnes of corn, the corn grower will be required to short 100 futures contracts.

The effect of putting in place the hedge should guarantee that the corn grower will be able to sell the 5,000 tonnes of corn at EUR 130.00/ton for a total amount of EUR 650,000. Let’s see how this is achieved by looking at scenarios in which the price of corn makes a significant move either upwards or downwards by delivery date.

Scenario #1: Corn Spot Price Fell by 10% to EUR 116.33/ton on Delivery Date

As per the sales contract, the corn grower will have to sell the corn at only EUR 116.33/ton, resulting in a net sales proceeds of EUR 581,625.

By delivery date, the corn futures price will have converged with the corn spot price and will be equal to EUR 116.33/ton. As the short futures position was entered at EUR 130.00/ton, it will have gained EUR 130.00 – EUR 116.33 = EUR 13.68 per tonne. With 100 contracts covering a total of 5000 tonnes, the total gain from the short futures position is EUR 68,375

Together, the gain in the corn futures market and the amount realised from the sales contract will total EUR 68,375 + EUR 581,625 = EUR 650,000. This amount is equivalent to selling 5,000 tonnes of corn at EUR 130.00/ton.

Scenario #2: Corn Spot Price Rose by 10% to EUR 142.18/ton on Delivery Date

With the increase in corn price to EUR 142.18/ton, the corn producer will be able to sell the 5,000 tonnes of corn for a higher net sales proceeds of EUR 710,875.

However, as the short futures position was entered at a lower price of EUR 130.00/ton, it will have lost EUR 142.18 – EUR 130.00 = EUR 12.18 per tonne. With 100 contracts covering a total of 5,000 tonnes of corn, the total loss from the short futures position is EUR 60,875.

In the end, the higher sales proceeds is offset by the loss in the corn futures market, resulting in a net proceeds of EUR 710,875 – EUR 60,875 = EUR 650,000. Again, this is the same amount that would be received by selling 5,000 tonnes of corn at EUR 130.00/ton.

Risk/Reward Tradeoff

As can be seen from the above examples, the downside of the short hedge is that the corn seller would have been better off without the hedge if the price of the commodity went up.

An alternative way of hedging against falling corn prices while still be able to benefit from a rise in corn price is to buy corn put options.

Learn More About Corn Futures & Options Trading

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Choice!
    Free Trading Education!
    Free Demo Account!
    Big Sign-Up Bonus!

  • Binomo
    Binomo

    Good Choice For Experienced Traders!!!

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