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Disclaimer:
This web page is designed to aid farmers with their marketing and risk
management decisions. The risk of loss in trading futures, options,
forward contracts, and hedge-to-arrive can be substantial and no warranty
is given or implied by the author or any other party. Each farmer must
consider whether such marketing strategies are appropriate for his or her
situation. This web page does not represent the views of Kansas State
University. |
| Compare Livestock Risk Protection (LRP) Contract with
Chicago Mercantile Exchange (CME) Put Option Premiums for Similar Coverage |
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Current |
History |
| 1 |
Coverage Date |
10/30/2003 |
10/29/2003 |
10/28/2003 |
10/27/2003 |
10/24/2003 |
10/23/2003 |
| 2 |
Option Expires |
4/29/2004 |
4/29/2004 |
4/29/2004 |
4/29/2004 |
4/29/2004 |
4/29/2004 |
| 3 |
April Futures Price |
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| 4 |
Futures
Increase/Decrease |
($1.500) |
$0.350 |
($1.500) |
$0.650 |
$1.250 |
$1.250 |
| 5 |
April Feeder Cattle Futures Close |
$87.050 |
$88.550 |
$88.200 |
$89.700 |
$89.050 |
$87.800 |
| 6 |
April Feeder Cattle Put Strike |
$84.00 |
$82.00 |
$84.00 |
$84.00 |
$82.00 |
$82.00 |
| 7 |
Calculated Implied Put Volatility |
19.49 |
21.44 |
20.27 |
20.98 |
21.75 |
21.62 |
| 8 |
Weeks to Expiration |
26.000 |
26.100 |
26.300 |
26.400 |
26.900 |
27.000 |
| 9 |
Short-term Interest Rate |
1.58% |
1.55% |
1.51% |
1.51% |
1.54% |
1.61% |
| 10 |
April Put Premium |
$3.300 |
$2.500 |
$3.100 |
$2.800 |
$2.500 |
$2.850 |
| 11 |
KSU Extimated Price1 |
$89.332 |
$90.736 |
$88.257 |
$91.436 |
$89.095 |
$87.787 |
| 12 |
Mar/Apr Wt KSU Est.Volatility2 |
20.51 |
23.15 |
20.16 |
21.75 |
21.75 |
22.17 |
| 13 |
Ajusted Put Premium3 |
$2.761 |
$2.284 |
$3.033 |
$2.435 |
$2.432 |
$2.900 |
| 14 |
Total Contract Premium |
$1,650.00 |
$1,250.00 |
$1,550.00 |
$1,400.00 |
$1,250.00 |
$1,425.00 |
| 15 |
Commission4 |
$75 |
$75 |
$75 |
$75 |
$75 |
$75 |
| 16 |
Total Producer Costs |
$1,725.00 |
$1,325.00 |
$1,625.00 |
$1,475.00 |
$1,325.00 |
$1,500.00 |
| 17 |
Premium Adjusted for Strike Price |
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| 18 |
and
LRP Expiration Date5 |
$2.761 |
$2.284 |
$3.033 |
$2.435 |
$2.432 |
$2.900 |
| 19 |
Comparison Premium |
$1,455.50 |
$1,217.00 |
$1,591.50 |
$1,292.50 |
$1,291.00 |
$1,525.00 |
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| 20 |
LRP Expires |
4/29/2004 |
4/28/2004 |
4/27/2004 |
4/26/2004 |
4/23/2004 |
4/22/2004 |
| 21 |
LRP Weeks Covered6 |
26.0 |
26.0 |
26.0 |
26.0 |
26.0 |
26.0 |
| 22 |
Coverage Level |
92.4100% |
90.6600% |
93.5300% |
92.4100% |
93.4000% |
94.7500% |
| 23 |
LRP Expected Price |
$90.899 |
$90.448 |
$89.821 |
$90.910 |
$87.848 |
$86.617 |
| 24 |
KSU Estimate vs. Offical LRP Pric |
-$0.163 |
-$2.191 |
$1.614 |
-$1.815 |
-$0.061 |
-$0.095 |
| 25 |
LRP Expected Price Change |
$0.451 |
$0.626 |
($1.089) |
$3.062 |
$1.231 |
($0.939) |
| 26 |
LRP Guarantee "Put Strike"7 |
$84.00 |
$82.00 |
$84.01 |
$84.01 |
$82.05 |
$82.07 |
| 27 |
Premium/head/750 lbs calf8 |
$22.89 |
$17.71 |
$18.52 |
$22.72 |
$21.03 |
$24.02 |
| 28 |
Tot LRP Prem/CME Contract9 |
$1,526.00 |
$1,180.67 |
$1,234.67 |
$1,514.67 |
$1,402.00 |
$1,601.33 |
| 29 |
Cash Premium Difference |
($199.00) |
($144.33) |
($390.33) |
$39.67 |
$77.00 |
$101.33 |
| 30 |
% LRP Discount vs Cash Put |
(11.54%) |
(10.89%) |
(24.02%) |
2.69% |
5.81% |
6.76% |
| 31 |
Adjusted Premium Difference |
$70.50 |
($36.33) |
($356.83) |
$222.17 |
$111.00 |
$76.33 |
| 32 |
% LRP Discount vs Adj. Put |
4.84% |
(2.99%) |
(22.42%) |
17.19% |
8.60% |
5.01% |
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| 1Because the LRP expires between
the March and April put expiration dates, a weighted average price
between March and April futures closing prices were calculated to
estimate the expected ending market price based on today's market.
The change in the weighted average price was then subtracted
from the current LRP expected price to forecast tomorrow's LRP
expected price. The KSU
expected price will compare with tomorrow's LRP expected price that
is reported on line 23. KSU
does not have access to the RMA model used to set the one day
delayed LRP expected price. |
| 2A
weighted average of the March and April implied put volatilities was
calculated. |
| 3The current LRP strike, current
LRP expiration date, KSU estimated expected price, and weighted
volatility based on the current market was then used to calculate
the adjusted put premium that will compare with the LRP premium. |
| 4Commissions vary and some brokers
charge a flat commission for options that includes the sale of the
option, if it is in-the-money. |
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| 5The strike price and time value
left in the option do not match the LRP guarantee on most days.
Therefore, the put premium was adjusted to reflect the LRP
strike and remaining time value so the two products could be
compared. |
| 6The LRP contract based on the
April Put declines in time coverage daily.
For example the coverage weeks declined from 30 weeks on
10/2/03 to 26 weeks on 10/3/03. |
| 7The LRP strike varies daily and
is based on the expected market price and can not exceed 95% of the
expected market price. |
| 8LRP
premiums are based on the previous day's close of CME option market. |
| 9LRP premiums were adjusted to
cover 66.67 head of 750 pound calves or 50,000 pounds that is
equivalent to a CME option. Unlike
the futures and options, LRP does not have a fixed size contract.
For example a producer could purchase an LRP contract on 10
head of 750 pound calves for a total of 7,500 pounds. |
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