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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 |
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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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