AGEC 420

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AGEC 420

• Markets
• TradeSim - questions?
• Hedged storage final example
• Quiz 4

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Open Position - MidAm Wheat

• Fri., Feb 15
• Bot 1 MidAm May Wheat _at_ 2.82 Sell stop _at_ 2.74½
• Close /-
• Fri., Feb 15 2.81 ¾ -2.50
• Fri., Feb 22 2.86 ¼ 42.50
• Fri., Mar 1 2.78 ½ -35.00
• Today ???

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Open Position - MidAm Corn

• Wed., Mar 6
• Order Buy 1 MidAm Dec Corn _at_ 2.30 Bot _at_ 229¼
• Margin check written today for 125
• Checking Account 850 - 175 (Wheat) - 125
  (Corn)
• Close /-
• Today ???

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Hedged Storage Final Example

• Concordia 1st week December
• Cash KCDec Basis
• 1996 4.08 4.36 -28
• 1997 3.28 3.51 -23
• 1998 2.72 3.08 -36
• 1999 ???

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Example

• Wheat Aug 4, 1999
• Cash price, Concordia, 2.28,
• Dec KC futures, 3.11
• Opening basis -0.83
• Expected Dec 1 basis -0.40 ??
• Projected improvement 0.43 ??

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Example (cont.)

• Cost of carry
• Elevator
  
• Storage cost per month 0.04
• Interest cost per month 0.02
• (10 x 2.28 x 1/12)
• Total cost per month 0.06
• Cost for 4 months 0.24

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Decision ?

• For the time period Aug 4 Dec 1
• Projected basis improvement 0.43
• Storage Cost 0.24
• Expected profit 0.43 - 0.24 19c/bu
• i.e., expected profit relative to selling on Aug
  4.
• Decision Store and hedge by selling Dec. futures

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Example (cont.)

• December 1, 1999
• Cash price, Concordia, 2.19
• Dec. futures, 2.64 ? Basis is -0.45
• Expected basis was -0.40
• ? Made 5c less than anticipated

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Calculate Storage Profit

• Cash
• Buy (own) on Aug 4 _at_ 2.28
• Sell on Dec 1 _at_ 2.19 ? Loss of 9c/bu on cash
• Futures
• Sell on Aug 4 _at_ 3.11
• Buy on Dec 1 _at_ 2.64 ? Profit of 47c/bu on futures
• Storage cost 4 mo _at_ 6c/mo 24c
• Profit 0.47 - 0.09 - 0.24 14c/bu

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Concordia Basis - 1999
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Basis improvement - Storage cost
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Concordia Storage Profit
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What if ?

• On November 1, 1999
• Cash price, Concordia, 2.24
• Dec. futures, 2.66 ? Basis is -0.42
• Should you continue to store till Dec. 1 ?

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Re-evaluate on Nov. 1

• Basis on Nov 1 -0.42
• Exp. Basis, Dec 1 -0.40
• ? Expected strengthening
• from Nov. 1 to Dec. 1 is 2 cents.
• But storage cost per month is 6 cents
• ? Sell on Nov 1.

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Calculate Profit on Nov. 1

• Cash
• Buy (own) on Aug 4 _at_ 2.28
• Sell on Nov 1 _at_ 2.24 ? Loss of 4c/bu on cash
• Futures
• Sell on Aug 4 _at_ 3.11
• Buy on Nov 1 _at_ 2.66 ? Profit of 45c/bu on futures
• Storage cost 3 mo _at_ 6c/mo 18c
• Profit 0.45 - 0.04 - 0.18 23c/bu

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Once again !!

• Store only if and as long as projected basis
  improvement gt storage cost

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Next week

• Alternatives to Storage Hedge
• Pit Simulation Exercise
• Dont forget readings Chapters 5 and 6 in
  Random Walk Down Wall Street