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AUTHOR(S):

Wataru Sagisaka, Teruji Sekozawa

 

TITLE

Evaluation of Options for Stabilization of Potato Farmer Income

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ABSTRACT

In this study, we propose a put option on a farm product to stabilize farmer income and a call option to stabilize consumer cost. We take the potato as an example of a farm product with a market price liable to change, and focus in particular on potato farmers in Hokkaido, who serve as the mainstay of potato farming in Japan, and as their trading counterparts, we focus on the companies that produce and sell processed foods with Hokkaido potatoes as production material. We use as a reference data their market prices and shipment amounts over the past 20 years of trading at the Tokyo Metropolitan Central Wholesale Market, which is the main destination of potatoes produced in Hokkaido. We take as the farmer income the amount paid by the company for the potato purchases. The farmer income and the company cost vary with the market price at the time of trade. In this study, we propose a derivative for stabilization of farmer income and company cost. The farmer is given a put option to avoid the risk of the market price going below a strike price set in advance. The company is given a call option with a strike price set in advance to avoid the risk of the market price rising above the strike price. The annual farmer income and company cost are calculated from the market price and shipment amount, and the standard deviations are taken as the variations in income and cost. Under adoption of these options, the derivative is evaluated in terms of the reduction in the standard deviations of farmer income and company cost, and thus the stabilization obtained. The farmer and company option holders each pay a premium to the option provider, who obtains boundaries for the strike price and the premium pricing that will allow it to gain a certain profit. Within these boundaries, the strike prices yielding the smallest standard deviations in farmer income and company cost are calculated. When the strike prices are set, in order to gain a profit, the option provider sets the premiums as the consideration necessary for stabilization of farmer income and company cost. The derivative is evaluated on the basis of the standard deviation reductions due to holding the options and the related consideration.

KEYWORDS

Derivative, Real option, Call option, Put option, Futures trading, Market analysis

 

Cite this paper

Wataru Sagisaka, Teruji Sekozawa. (2018) Evaluation of Options for Stabilization of Potato Farmer Income. International Journal of Agricultural Science, 3, 67-72

 

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