Future Contracts Option

Future Contracts Option

• Date Submitted: 03/15/2009 10:17 AM
• Words: 2738
• Page: 11
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Kim Anderson
Extension Agricultural Economist

The cash price received for most agricultural commodities
traded on futures exchanges is determined by the underlying
futures contracts. The following equation may be used
to determine the cash price (OSU Facts Sheet # 548): cash
price = futures contract price + basis. The appropriate
futures contract price directly impacts the cash price.
The equation, cash price = futures price + basis is a
key to understanding how to use pricing tools (Figure 1). Each
tool and cash price may be thought of as a piece of a puzzle.
Just as each pricing tool is connected, each puzzle piece is
connected indirectly to every other piece of the puzzle.
For example, the puzzle piece cash price does not
change unless either the futures price or basis changes. If the
futures price increases 5 cents per bushel and the basis does
not change, the cash price increases 5 cents per bushel.
Conversely, if the futures price decreases 5 cents per bushel
and the basis does not change, the cash price decreases 5
cents per bushel.
In grain markets, the basis is relatively stable. Major
changes in the cash price are mostly caused by changes in the
futures contract price. There are many futures contracts. For
hard red winter wheat, there are five contracts; March, May,
July, September, and December. The cash price is determined
by the next contract to expire before the expiration month.
For example, during December, January, and February,
the Kansas City Board of Trade (KCBT) March contract is
used to determine the cash price. During March and April, the
KCBT May contract is used. During May and June, the KCBT
July contract is used. During July and August, the KCBT
September contract is used. And during September, October,
and November, the KCBT December contract is used to
determine the cash price.
A key to understanding the market is to understand this
simple principle: The equality, cash price = futures price +...