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Thomas Commidity and Risk

Terms in this set (19)

A Raw material or primary ag product that can be bought and sold within an established mkt
Commodity
What types of risk do ag producers face?
1. Production Risk( weather, bio)
2.Marketing Risk( buyers/ sellers, farmers price takers)
3. Policy Risk(Gov change policy which affect S/D and thus price)
What can producers do to manage these risks?
For production they can use best mang practices, but producers can also use:
1.securitization, for example insurance
2.Finiancial instruments, forward and future contracts and swap options to transfer risk to others
Contacts calling for the future delivery of a good or service at a specified price and point in time
Forward Contracts
Downside to forward contracts?
Since price will be determined at a future date, price could still change between now and then so it does not remove price risk for either party, big change in price would affect one party and not the other
Seller and buyer contract today and agree to future delivery of commodity. These contracts can then be bought and sold by third parties who have no position in the physical commodity, third party takes on risk, allows farmers and manufacturers to avoid price risk.
Future Contract
One person wins in the mkt at the expense of the others
Zero sum game
Those that Transact business in the underlying commodity
Hedgers
Production, storage and manufacturing

Actually use the commodity as a part of their business
Actual commodity business
Parties who like to take risks to make profits aren't a actual commodity business usually
Speculators
Hedgers and speculators form this mkt
Futures Mkt
Take two positions, one that wins with price increase and one that wins with price decrease
Hedging
True or False 75% of speculators lose money
True
5%, so if a $10,000 contract would require a $500 version of this. A ___ is there to cover any loses the speculator might sustain. If the contract drops below $333, 2/3rd the speculator will receive a ____ call
margin
____ when the commodity is actually delivered at the spot market
Actual price
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