scholarly journals Analysis of the Risk Management Properties of Grazing Contracts Versus Futures and Option Contracts

1996 ◽  
Vol 28 (2) ◽  
pp. 247-262 ◽  
Author(s):  
R. Wes Harrison ◽  
Barry W. Bobst ◽  
Fred J. Benson ◽  
Lee Meyer
Keyword(s):  
Risk Management ◽  
Stochastic Dominance ◽  
Risk Averse ◽  
Integrated Production ◽  
Feeder Cattle ◽  
Option Contracts ◽  
Put Option ◽  
Price Risks

AbstractA stochastic budget simulator and generalized stochastic dominance are used to compare the risk management properties of grazing contracts to futures and option contracts. The results show that the risks of backgrounding feeder cattle are reduced significantly for pasture owners in a grazing contract. However, the risks of the cattle owner in a grazing contract are not significantly reduced. The results also show that generally risk averse pasture owners prefer grazing contracts to integrated production when traditional hedging is used to manage price risks. In addition, grazing contracts compare favorably with put option contracts for some pasture owners.

scholarly journals Stochastic Dominance Analysis of Futures and Option Strategies for Hedging Feeder Cattle

1998 ◽  
Vol 27 (2) ◽  
pp. 270-280 ◽  
Author(s):  
R. Wes Harrison
Keyword(s):  
United States ◽  
Stochastic Dominance ◽  
The United States ◽  
Futures Contracts ◽  
Risk Averse ◽  
Feeder Cattle ◽  
Futures Contract ◽  
Risk Return ◽  
Put Option ◽  
Option Strategies

Stochastic simulation and generalized stochastic dominance are used to compare the risk-return properties of the Chicago Mercantile Exchange feeder cattle futures contract with those of the feeder cattle put option contract. Cash marketing, futures, and option strategies are analyzed for four backgrounding systems common to the mid-south region of the United States. The results show that at-the-money put option strategies dominate corresponding futures contract strategies according to generalized stochastic dominance. This implies that at-the-money put option contracts are superior to feeder cattle futures contracts for risk-averse backgrounders in the mid-south region of the United States.

Construction material supply risk management using Asian option contracts: the case of a pipeline project

2020 ◽  
Vol 27 (10) ◽  
pp. 3395-3414
Author(s):  
Mohammad Vahdatmanesh ◽  
Afshin Firouzi
Keyword(s):  
Risk Management ◽  
Scenario Analysis ◽  
Price Risk ◽  
Asian Option ◽  
Steel Pipeline ◽  
Content Type ◽  
Price Fluctuations ◽  
Option Contracts ◽  
Pipeline Project ◽  
Total Price

PurposeSteel price uncertainty exposes pipeline projects that are inherently capital intensive to the risk of cost overruns. The current study proposes a hedging methodology for tackling steel pipeline price risk by deploying Asian option contracts that address the shortcomings of current risk mitigation strategies.Design/methodology/approachA stepwise methodology is introduced, which uses a closed-form formula as an Asian option valuation method for calculating this total expenditure. The scenario analysis of three price trends examines whether or not the approach is beneficial to users. The sensitivity analysis then has been conducted using the financial option Greeks to assess the effects of changes in volatility in the total price of the option contracts. The total price of the Asian options was then compared with those of the European and American options.FindingsThe results demonstrate that the Asian option expenditure was about 1.87% of the total cost of the case study project. The scenario analysis revealed that, except for when the price followed a continuous downward pattern, the use of this type of financial instrument is a practical approach for steel pipeline price risk management.Practical implicationsThis approach is founded on a well-established financial options theory and elucidates how pipeline project participants can deploy Asian option contracts to safeguard against steel price fluctuations in practice.Originality/valueAlthough the literature exists about the theory and application of financial derivative instruments for risk management in other sectors, their application to the construction industry is infrequent. In the proposed methodology, all participants involved in fixed price pipeline projects readily surmount the risk of exposure to material price fluctuations.

scholarly journals PENENTUAN HARGA KONTRAK OPSI KOMODITAS EMAS MENGGUNAKAN METODE POHON BINOMIAL

2017 ◽  
Vol 6 (2) ◽  
pp. 99
Author(s):  
I GEDE RENDIAWAN ADI BRATHA ◽  
KOMANG DHARMAWAN ◽  
NI LUH PUTU SUCIPTAWATI
Keyword(s):  
Option Prices ◽  
European Option ◽  
Binomial Tree ◽  
Call Options ◽  
Option Contracts ◽  
Put Option ◽  
Black Scholes ◽  
Tree Method

Holding option contracts are considered as a new way to invest. In pricing the option contracts, an investor can apply the binomial tree method. The aim of this paper is to present how the European option contracts are calculated using binomial tree method with some different choices of strike prices. Then, the results are compared with the Black-Scholes method. The results obtained show the prices of call options contracts of European type calculated by the binomial tree method tends to be cheaper compared with the price of that calculated by the Black-Scholes method. In contrast to the put option prices, the prices calculated by the binomial tree method are slightly more expensive.

Combined Custom Hedging: Optimal Design, Noninsurable Exposure, and Operational Risk Management

2021 ◽  
Author(s):  
Paolo Guiotto ◽  
Andrea Roncoroni
Keyword(s):  
Risk Management ◽  
Optimal Design ◽  
Operations Management ◽  
Operational Risk ◽  
Financial Derivatives ◽  
Theoretical Ground ◽  
Risk Averse ◽  
Value Assessment ◽  
Operational Risk Management ◽  
Payoff Functions

Optimal Design of Combined Contingent Claims: Theory and Applications. In “Combined Custom Hedging: Optimal Design, Noninsurable Exposure, and Operational Risk Management”, Paolo Guiotto and Andrea Roncoroni develop a normative framework for the optimal design, value assessment, and operations management integration of financial derivatives. Most business and operating revenues entail a mix of financially insurable and noninsurable risk. A risk-averse firm may face them by positioning in a pair of financial derivatives with optimal bespoke payoff functions; one claim is written on the insurable term, and the other claim is written on any observable index exhibiting correlation to the noninsurable term. On a theoretical ground, the authors 1) state the problem in a general setup and prove existence and uniqueness of the optimal pair of combined claims, 2) show that the optimal payoff functions satisfy a Fredholm integral equation, and 3) assess the incremental benefit the firm obtains by switching from the optimal single-claim custom hedge to the optimal combined custom hedge they propose. On an experimental ground, they show that 1) the optimal combined custom hedge would be empirically relevant for a highly risk-averse firm facing a market shock shown during the first period of the COVID-19 pandemic in 2020, 2) integration with the optimal procurement in a generalized newsvendor model leads to a significant improvement in both risk and return, and: 3) this gain can be traded off for a substantial enhancement in operational flexibility.

Evaluating the Efficiency of Portfolio-Hedging Strategies by Incorporating Third Degree Stochastic Dominance Criteria and Data Envelopment Analysis

2021 ◽  
pp. 22-46
Author(s):  
Margareta Gardijan Kedžo
Keyword(s):  
Data Envelopment Analysis ◽  
Stochastic Dominance ◽  
Data Envelopment ◽  
Risk Averse ◽  
Super Efficiency ◽  
Risk Hedging ◽  
The Third ◽  
Positive Skewness ◽  
Hedging Strategies ◽  
Efficient Hedging

The chapter investigates chosen hedging strategies with options as useful risk hedging instruments. Assuming that average investor prefers greater return, is risk-averse, and prefers greater positive skewness, the performance of different hedged and unhedged portfolios is evaluated using stochastic dominance (SD) criteria and data envelopment analysis (DEA). The SD is examined up to the third degree (TSD) using Davidson-Duclos (DD) test. In the DEA, a super efficiency BCC model is used. It is investigated how these two methodologies can be combined and how the TSD criteria can be integrated into DEA in order to simplify the analysis of determining efficient hedging strategies with options.

scholarly journals Risk Management Strategies to Reduce Net Income Variability for Farmers

1985 ◽  
Vol 17 (1) ◽  
pp. 117-130 ◽  
Author(s):  
Hamid Falatoonzadeh ◽  
J. Richard Conner ◽  
Rulon D. Pope
Keyword(s):  
Risk Management ◽  
Crop Production ◽  
Management Strategies ◽  
Farm Income ◽  
Net Income ◽  
Combination Strategy ◽  
Management Tools ◽  
Risk Management Strategies ◽  
Price Risks ◽  
The Many

AbstractThe most useful and practical strategy available for reducing variability of net farm income is ascertained. Of the many risk management tools presently available, five of the most commonly used are simultaneously incorporated in an empirically tested model. Quadratic programming provides the basis for decisionmaking in risk management wherein expected utility is assumed to be a function of the mean and variance of net income. Results demonstrate that farmers can reduce production and price risks when a combination strategy including a diversified crop production plan and participation in the futures market and the Federal Crop Insurance Program (FCIP) is implemented.

Nitrogen-Fixing Winter Cover Crops and Production Risk: A Case Study for No-Tillage Corn

1998 ◽  
Vol 30 (1) ◽  
pp. 163-174 ◽  
Author(s):  
James A. Larson ◽  
Roland K. Roberts ◽  
Donald D. Tyler ◽  
Bob N. Duck ◽  
Stephen P. Slinsky
Keyword(s):  
Cover Crops ◽  
Stochastic Dominance ◽  
Nitrogen Fertilization ◽  
Risk Averse ◽  
Production Risk ◽  
Risk Seeking ◽  
Wide Range ◽  
Seeking Behavior ◽  
Net Revenue ◽  
Applied Nitrogen

AbstractWinter legumes can substitute for applied nitrogen fertilization of corn. Stochastic dominance was used to order net revenues from legume and applied nitrogen alternatives. Stochastic dominance orderings indicate that systems combining vetch with low applied nitrogen fertilization (50 and 100 pounds/acre, respectively) were risk inefficient. By contrast, vetch and 150 pounds/acre applied nitrogen maximized expected net revenue and was risk efficient for a wide range of risk-averse and risk-seeking behavior. Farmers with these risk attitudes may not reduce applied nitrogen if they switch to a vetch cover. Extremely risk-averse or risk-seeking farmers would not prefer winter legumes.

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