Interview With Hank Who Buys And Stores Wheat Flashcards
Why would it be easier for hank to sell wheat at the same time he buys it?
He could work out costs for storage, interest, warehouse storage and stransport costs to lock in a profit margin
What what differentials would hank be at risk on of he could see straight away?
If interest or transport rates increased before shipping
What does hank do if he can’t sell straight away?
Sell futures as a hedge.
When hank buys physical wheat from a farm…
He sells the equivalent amount in the futures market
Why would hank sell the equivalent amount in the futures market?
It elimanates his risk in the movement of the OUTRIGHT price of wheat.
If the prices go down for the outright price of wheat…
Hank will make money on the futures - his futures hedge but he will lose an offsetting amount of money on physical wheat
If he has sold wheat for a certain price in the future and the outright price of wheat goes down
Then hank makes money on his futures sale because they stay the same price he sold them at which is now higher than the outright price of wheat
If the price of wheat goes up…
He will lose money on the futures hedge as he sold it for a cheaper price l, but he gains an offsetting amount in physical wheat
The outright price of wheat doesn’t matter
Because the gains and losses between the futures hedge price and physical price should balance themselves out
The trader is not interested in the outright price, but most interested in
The prices of that commodity in different geographies, times and forms
It’s the price,…. That matters not the outright price
Price differential
Outright price =… Price
Flat price
There is a different…. For each delivery month for each contract
Basis
Basis =
Cahs price minus futures price
What does a trader do of he thinks the cash price is too high relative to the futures?
Sell the basis
What does a trader do of he thinks the cash price is too low relative to the futures price?
Buy the basis
What would happen if wheat goes up in short and long term? Because of the weather r
Speculators would push the price of wheat futures higher, making the spread with physical wheat price bigger. You would lose more money on futures than on physicals
What is the biggest produced wheat in US?
Winter wheat 70-80pc of total production
Chicago mercentaile exchange CME trades
Soft red winter wheat for flour and bread
Kansas city board of trade trades..
Red winter wheat, bread making
Where do you hedge your wheat? What are risks
You could be at risk on price differential between specs of wheat bought and hedged on futures market, and at risk om geography. Transport costs between rigion changes.
All hank does is trade the….
Basis.
Hank trades the basis,
The differential between physical wheat and the futures market.
Hnak anticipates… But hedges on….
Changes in the basis… The outright price
Commodity trading is….
Selling something you don’t have to someone who doesn’t want it
Why is commodity trading from someone who doesn’t have it to someone who doesn’t want it.
The farmer doesn’t have the grain he is selling and hank doesn’t want the grain, he’s only buying it ahead of harvest because the farmer wants to sell it ahead of harvest.
What is a farmer scared of?
If his neighbours increase the amount of land they sow, by the time harvest comes around the price of wheat may have dropped below his production costs
