Comparing Pricing Alternatives

Problem: How to sell this year's soybean crop. Its November, the crop is safely in the bin, and you dont need the money until March.

Strategies: 1. Store until March and sell for whatever the cash price is then.

2. Forward cash contract for March delivery, at $10.20 per bushel

3. Hedge by selling a March futures contract at $10.75. Buy back the contract in March, then sell the soybeans for cash.

4. Buy PUT options at a $11.70 strike price for March futures, for a premium of $.20 per bushel. Sell the PUTs in March, then sell the soybeans for cash.

Results in March

Strategy	Scenario 1: Prices fall, basis widens March futures price = $9.50 Basis = $.80 March cash price = $__________ PUT option value = $1.45 (market went down $1.25)	Scenario 2: Prices rise, basis narrows March futures price = $12.40 Basis = $.40 March cash price = $__________ PUT option value = $ .00 (market went up more than $.20)
1. Store and sell in March at cash price	Net price = $_____________	Net price = $_____________
2.Forward contract and deliver in March	Net price = $_____________	Net price = $_____________ [
3.Sell futures contract, buy it back in March, sell beans for cash price (gain or loss on futures, plus cash price)	Gain/loss on futures = $_________ Cash price $_________ Net price = $_________	Gain/loss on futures = $_________ Cash price $_________ Net price = $_________
4.Buy PUT option now, sell PUT in March, sell beans for cash price (gain or loss on PUT, plus cash price)	Gain/loss on PUT = $___________ Cash price $___________ Net price = $___ ________	Gain/loss on PUT = $___________ Cash price $___________ Net price = $___ ________

Which strategy has the highest net price? _______________ ________________

Which strategy has the lowest net price? _______________ ________________

Which strategy is most risky? __________________ (widest range of results)

Which strategy is least risky? __________________ (narrowest range of results)