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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

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?

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