This Case is about FINANCIAL MARKETS
PUBLICATION DATE: January 01, 2008 PRODUCT #: KEL343-PDF-ENG
Milk and Money Case SolutionThe fiscal success of dairy farms is critically based on the cost of their primary end product, milk. A significant company threat is posed by big unpredictability in the cost of milk to dairy farms. This is especially true for family-run dairy farms. The question then arises: how can the milk cost danger be hedged by a farm owner? The conventional way of creating a price floor for a commodity like milk is always to buy put options on commodity futures contract. On the cost of various milk products, farmers can purchase put options at the Chicago Mercantile Exchange. On the other hand, the cost is distinctive to the farm and a farm receives for its milk is dependent upon many variables. As a substitute the farmer must evaluate which of the options available for commerce at the Chicago Mercantile Exchange offer the greatest hedge for his own milk cost. Pupils must find the cost that’s closely correlated to the farm’s milk cost and to subsequently select alternatives with the proper strike price that function as the greatest hedge for the cost danger of the farm.
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