The fiscal success of dairy farms depends critically on the price of their principal end product, milk. Big unpredictability in the price of milk presents a significant company risk to dairy farms. This is particularly true for family-run dairy farms. The question then arises: how can a farm owner hedge the milk cost risk? The typical approach to establish a price floor for a commodity such as milk is always to buy put options on commodity futures contract. At the Chicago Mercantile Exchange, farmers can purchase put options on the cost of a number of milk products. On the other hand, the cost a farm receives for its milk is dependent upon many variables and is unique to the farm.
Instead the farmer must determine which of the options available for commerce at the Chicago Mercantile Exchange offer the greatest hedge for his own milk cost. Students must find the price that is certainly most closely correlated to the milk price of the farm and to then choose options with the appropriate strike price that serve as the greatest hedge for the price risk of the farm.
Milk and Money Case Study Solution
PUBLICATION DATE: January 01, 2008 PRODUCT #: KEL343-PDF-ENG
This is just an excerpt. This case is about FINANCE & ACCOUNTING
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