MRKT 325 Lecture Notes - Lecture 6: Cash Flow, Grain Elevator, Basis Risk
Document Summary
Module 2 (b: marketing with cash-based contracts, example: figuring out target prices and risk, we"re just focusing on prices here at this point, we"ll discuss other dimensions later. Example (cont"ed: the producer calls the local grain elevator and the manager offers him four alternatives, forward contract, hedge-to-arrive contract, minimum price contract, basis contract. Minimum arrive contract price contract price or basis. = sh. 55/bu reference price delivery date service fee (cost) Target prices: futures contract, target price = today"s futures price + expected basis fee. . 23/bu sh. 50/bu sh. 01/bu = . 72/bu: forward contract, final price = . 78/bu (already determined in the contract, basis contract, target price = futures price to be locked in + basis in the contract. Full price is given in forward contract, do not have to worry about basis futures price to be locked in sh. 55/bu. Basis is certain, but the price is something that will be locked in sometime in the future.
