Commodity price risk management using option strategies

Abstract

In the world of increasing price volatility, it is more important than ever to understand how to manage the price risk. The paper deals with the price risk management issues associated with commodities. Using options is performed by an analysis of hedging strategies in the commodity market. The authors focus on the application of the vanilla option strategies to risk management in order to point out the advantages and disadvantages of each hedging strategy. Based on the general expressions of selling price intervals, there are modelled various hedged scenarios of wheat. The authors look at the wheat option contracts traded on the Chicago Board of Trade. The comparative comparison of the option hedging strategies has shown the best results for the commodity seller who hedges against a price decline.

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