# Hedging Against Rising Corn Prices using Corn Futures

Businesses that need to buy significant quantities of corn can hedge against rising corn price by taking up a position in the corn futures market.

These companies can employ what is known as a long hedge to secure a purchase price for a supply of corn that they will require sometime in the future.

To implement the long hedge, enough corn futures are to be purchased to cover the quantity of corn required by the business operator.

## Corn Futures Long Hedge Example

An ethanol producer will need to procure 5,000 tonnes of corn in 3 months' time. The prevailing spot price for corn is EUR 129.25/ton while the price of corn futures for delivery in 3 months' time is EUR 130.00/ton. To hedge against a rise in corn price, the ethanol producer decided to lock in a future purchase price of EUR 130.00/ton by taking a long position in an appropriate number of Euronext Corn futures contracts. With each Euronext Corn futures contract covering 50 tonnes of corn, the ethanol producer will be required to go long 100 futures contracts to implement the hedge.

The effect of putting in place the hedge should guarantee that the ethanol producer will be able to purchase the 5,000 tonnes of corn at EUR 130.00/ton for a total amount of EUR 650,000. Let's see how this is achieved by looking at scenarios in which the price of corn makes a significant move either upwards or downwards by delivery date.

### Scenario #1: Corn Spot Price Rose by 10% to EUR 142.18/ton on Delivery Date

With the increase in corn price to EUR 142.18/ton, the ethanol producer will now have to pay EUR 710,875 for the 5,000 tonnes of corn. However, the increased purchase price will be offset by the gains in the futures market.

By delivery date, the corn futures price will have converged with the corn spot price and will be equal to EUR 142.18/ton. As the long futures position was entered at a lower price of EUR 130.00/ton, it will have gained EUR 142.18 - EUR 130.00 = EUR 12.18 per tonne. With 100 contracts covering a total of 5,000 tonnes of corn, the total gain from the long futures position is EUR 60,875.

In the end, the higher purchase price is offset by the gain in the corn futures market, resulting in a net payment amount of EUR 710,875 - EUR 60,875 = EUR 650,000. This amount is equivalent to the amount payable when buying the 5,000 tonnes of corn at EUR 130.00/ton.

### Scenario #2: Corn Spot Price Fell by 10% to EUR 116.33/ton on Delivery Date

With the spot price having fallen to EUR 116.33/ton, the ethanol producer will only need to pay EUR 581,625 for the corn. However, the loss in the futures market will offset any savings made.

Again, by delivery date, the corn futures price will have converged with the corn spot price and will be equal to EUR 116.33/ton. As the long futures position was entered at EUR 130.00/ton, it will have lost EUR 130.00 - EUR 116.33 = EUR 13.68 per tonne. With 100 contracts covering a total of 5,000 tonnes, the total loss from the long futures position is EUR 68,375

Ultimately, the savings realised from the reduced purchase price for the commodity will be offset by the loss in the corn futures market and the net amount payable will be EUR 581,625 + EUR 68,375 = EUR 650,000. Once again, this amount is equivalent to buying 5,000 tonnes of corn at EUR 130.00/ton.

As you can see from the above examples, the downside of the long hedge is that the corn buyer would have been better off without the hedge if the price of the commodity fell.

An alternative way of hedging against rising corn prices while still be able to benefit from a fall in corn price is to buy corn call options.

### You May Also Like

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results....[Read on...]

### Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount....[Read on...]

### What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time.....[Read on...]

### Investing in Growth Stocks using LEAPSÂ® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPSÂ® and why I consider them to be a great option for investing in the next MicrosoftÂ®.... [Read on...]

### Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date....[Read on...]

### Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative....[Read on...]

### Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date....[Read on...]

### Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin....[Read on...]

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading.... [Read on...]

### What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator.... [Read on...]

### Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa.... [Read on...]

### Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as "the greeks".... [Read on...]

### Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow.... [Read on...]

#### Options Strategy Finder

Outlook on Underlying:

Profit Potential:

Loss Potential:

Credit/Debit:

No. Legs:

Risk Warning: Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account. You should not risk more than you afford to lose. Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Information on this website is provided strictly for informational and educational purposes only and is not intended as a trading recommendation service. TheOptionsGuide.com shall not be liable for any errors, omissions, or delays in the content, or for any actions taken in reliance thereon.

 General Risk Warning: The financial products offered by the company carry a high level of risk and can result in the loss of all your funds. You should never invest money that you cannot afford to lose.