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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 |
10/14/2003 |
10/13/2003 |
10/10/2003 |
10/9/2003 |
10/8/2003 |
10/7/2003 |
| 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) |
$1.500 |
$0.700 |
($1.300) |
$1.500 |
$1.500 |
| 5 |
April Feeder Cattle Futures Close |
$91.900 |
$93.400 |
$91.900 |
$91.200 |
$92.500 |
$91.000 |
| 6 |
April Feeder Cattle Put Strike |
$88.00 |
$88.00 |
$86.00 |
$86.00 |
$86.00 |
$84.00 |
| 7 |
Calculated Implied Put Volatility |
20.77 |
23.02 |
20.25 |
19.30 |
18.42 |
17.33 |
| 8 |
Weeks to Expiration |
28.300 |
28.400 |
28.900 |
29.000 |
29.100 |
29.300 |
| 9 |
Short-term Interest Rate |
1.44% |
144.00% |
1.44% |
1.47% |
1.44% |
1.46% |
| 10 |
April Put Premium |
$3.700 |
$3.800 |
$2.900 |
$2.900 |
$2.300 |
$1.850 |
| 11 |
Total Contract Premium |
$1,850.00 |
$1,900.00 |
$1,450.00 |
$1,450.00 |
$1,150.00 |
$925.00 |
| 12 |
Commission1 |
$75 |
$75 |
$75 |
$75 |
$75 |
$75 |
| 13 |
Total Producer Costs |
$1,925.00 |
$1,975.00 |
$1,525.00 |
$1,525.00 |
$1,225.00 |
$1,000.00 |
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Premium Adjusted for Strike Price |
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| 14 |
and LRP
Expiration Date2 |
$3.730 |
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$2.954 |
$2.895 |
$2.313 |
$1.852 |
| 15 |
Comparison Premium |
$1,940.00 |
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$1,552.00 |
$1,522.50 |
$1,231.50 |
$1,001.00 |
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| 16 |
LRP Expires |
4/13/2004 |
No Offer |
4/9/2004 |
4/8/2004 |
4/7/2004 |
4/6/2004 |
| 17 |
LRP Weeks Covered3 |
26.000 |
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26.000 |
26.000 |
26.000 |
26.000 |
| 18 |
Coverage Level |
94.2500% |
|
94.3500% |
93.0300% |
94.5500% |
93.9100% |
| 19 |
Expected Price |
$93.931 |
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$92.019 |
$93.153 |
$91.719 |
$90.289 |
| 20 |
LRP Expected Price Change |
$93.931 |
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($1.134) |
$1.434 |
$1.430 |
$1.287 |
| 21 |
LRP Guarantee "Put Strike"4 |
$88.53 |
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$86.82 |
$86.66 |
$86.72 |
$84.79 |
| 22 |
Premium/head/750 lbs calf5 |
$27.03 |
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$21.19 |
$16.69 |
$17.56 |
$14.58 |
| 23 |
LRP Adj. to CME Contract Size6 |
$1,802.00 |
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$1,412.67 |
$1,112.67 |
$1,170.67 |
$972.00 |
| 24 |
Total Producer Costs |
$1,802.00 |
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$1,412.67 |
$1,112.67 |
$1,170.67 |
$972.00 |
| 25 |
Adjusted Premium Difference |
($138.00) |
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($139.33) |
($409.83) |
($60.83) |
($29.00) |
| 26 |
% LRP Discount vs Adj. Put |
(7.11%) |
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(8.98%) |
(26.92%) |
(4.94%) |
(2.90%) |
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| 1Commissions vary and some brokers
charge a flat commission for options that includes the sale of the option,
if it is in-the-money. |
| 2The 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. |
| 3The 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. |
| 4The
LRP strike varies daily and is based on the expected market price and can
not exceed 95% of the expected market price. |
| 5LRP
premiums are based on the previous day's close of CME option market. |
| 6LRP 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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