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The Potential Value of Agricultural Trade Options

Published online by Cambridge University Press:  15 September 2016

Darren L. Frechette
Darren L. Frechette*
Affiliation:
Department of Agricultural Economics and Rural Sociology, The Pennsylvania State University
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Abstract

Hedgers located far from organized commodity exchanges suffer a mismatch between their local prices and exchange prices. Futures and options traded on the exchange may still be valuable to distant hedgers, but only to the extent that basis risk is small. Forward contracting allows hedgers to manage risk using a local delivery price, but the Commodity Futures Trading Commission has long banned the sale of off-exchange options, limiting the opportunities available to hedgers. Recently, agricultural trade options (ATOs) have been introduced as over-the-counter option products designed specifically for hedgers. To date, ATOs have found little interest from potential sellers, but the potential demand for these options may be substantial. This study develops a methodology for measuring the potential value of ATOs. It describes and quantifies the demand for corn ATOs by dairy farms in Pennsylvania and estimates the value these farms might place on ATO contracts offered locally.

Keywords

agricultural trade optionsdairy farmsfutureshedgingoptionsrisk management
Type
Articles
Information
Agricultural and Resource Economics Review , Volume 32 , Issue 2 , October 2003 , pp. 232 - 243
Copyright
Copyright © 2003 Northeastern Agricultural and Resource Economics Association 

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