Homework #4--Comparing Risk Management Alternatives
Below is a set of randomly generated yields based on Lubbock County historical yields for irrgated cotton. Also is a randomly generated set of cotton prices
drawn from the USDA estimate of the national average farm price for cotton. The correlation between the two is -.19 indicating that as yields rise, prices fall and vice versa.
Also given are relevant data for insurance prices ($/ac), options prices, yield and price guarantees, and option strike price. You will use these data in your analysis.
When complete, you will upload your answers to Blackboard using the filename: "HM4_firstname_lastname"
Instructions: Using the yield and price series given:
(1) Contstruct a revenue distribution.
(2) Using the given yields, yield guarantee for insurance, and the insurance price, create a revenue distribution (net of premiums) with the insurance in place at the full premium cost as well as at the subsidized cost.
(3) Using the given revenues, revenue guarantee for insurance, and the insurance price(s), create a revenue distribution (net of premiums) with the insurance in place at the full premium cost as well as at the subsidized cost.
(4) Using the given prices, option strike price (price guarantee for the option), and option premium, create a revenue distribution (net of option cost) with the option in place.
(5) BONUS (10pts): Combine the option and the subsidized yield to generate a distribution if both products are used (do not forget to include their cost).
ALL of these will require the use of IF statements to evaluate whether the guaratees are met and assign values when they are met or not met.
	Expected Price = 0.61
	Expected Yield = 869
	Yield Insurance (668# Coverage Level) Price/Ac FULL Cost	31.69
	Yield Insurance (668# Coverage Level) Price/Ac Subsidized Cost	12.99
	Revenue Insurance ($407/ac Coverage Level) FULL Cost	31.69
	Revenue Insurance ($407/ac Coverage Level) Subsidized Cost	12.99
	Option Premium ($/lb); 0.52 strike price		0.03
	Guaranteed Yield				668
	Guaranteed Revenue				407
	Insurance Guaranteed Price			0.61
	Option Strike Price				0.52
					Yield		Revenue
	Yield	Price	Revenue		Full	Sub		Full	Sub		Option		Option+Sub Yield
	1101.6631	0.58238319
	933.753449	0.72132477
	489.072099	0.60509197
	949.401893	0.50530049
	945.007641	0.67657935
	738.912578	0.45856973
	900.531898	0.64836567
	809.446935	0.72224462
	1097.34806	0.56230878
	953.140418	0.36194659
	1153.32243	0.39615902
	558.621295	0.83989337
	791.572171	0.48567933
	829.958453	0.53346204
	838.103253	0.74602865
	1114.27941	0.81254956
	485.602652	0.68057703
	874.406051	0.78523548
	618.396749	0.33899519
	928.188555	0.69042792
	704.758867	0.64500477
	1218.01602	0.58273444
	738.411692	0.66212335
	1033.55935	0.52966755
	795.166119	0.52811925
	832.217267	0.59541937
	1063.73744	0.36905102
	853.463439	0.67968748
	777.926491	0.8591029
	932.427848	0.59803316
Mean	868.680454	0.60673553
STD	186.153384	0.13985826
CV	0.21429443	0.23050943
Questions:
(1) What effect does using insurance or options have on the expected returns to the cotton farmer?
(2) What effect does using insurance or options have on the risk of returns for the cotton farmer?
(3) We note that the subsidized revenue insurance actually has a higher expected return than the uninsured returns. What do you think may cause this to happen?