The financial success of dairy farms is critically dependent on the price of their main conclusion, milk. Greater volatility in milk prices is a significant risk to the business in the dairy farms. This is especially true for family dairy farms. Then the question arises: how can the owner of the farm to hedge the risk of price of milk? The standard approach to the creation of a minimum price for the goods, such as milk is to buy options on commodity futures. On the Chicago Mercantile Exchange, farmers can buy put options at a price of various dairy products. However, the price at the farm receives for his milk depends on many factors and is unique to the farm. Thus, the farmer can not directly buy options on the price he receives for his farm produces milk. Instead, the farmer has to decide which of the options available for trading on the Chicago Mercantile Exchange offer the best hedge for the price of milk. Appointment in this case is to examine the historical data at multiple prices dairy products and milk price received by the family dairy farm in California. Students must find a price which is most closely correlated with milk prices at the farm and then select the appropriate options exercise price, which are the best hedge price risk for the farm. "Hide
Karl Schmedders, Patrick Johnston, Charlotte Snyder Source: Kellogg School Management 9 pages. Publication Date: January 1, 2008. Prod. #: KEL343-PDF-ENG
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