Commodity options as an alternative to hedging live cattle
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The Department of Economic Science was founded in 1898 to teach economic theory as a truth of industrial life, and was very much concerned with applying economics to business and industry, particularly agriculture. Between 1910 and 1967 it showed the growing influence of other social studies, such as sociology, history, and political science. Today it encompasses the majors of Agricultural Business (preparing for agricultural finance and management), Business Economics, and Economics (for advanced studies in business or economics or for careers in financing, management, insurance, etc).
History
The Department of Economic Science was founded in 1898 under the Division of Industrial Science (later College of Liberal Arts and Sciences); it became co-directed by the Division of Agriculture in 1919. In 1910 it became the Department of Economics and Political Science. In 1913 it became the Department of Applied Economics and Social Science; in 1924 it became the Department of Economics, History, and Sociology; in 1931 it became the Department of Economics and Sociology. In 1967 it became the Department of Economics, and in 2007 it became co-directed by the Colleges of Agriculture and Life Sciences, Liberal Arts and Sciences, and Business.
Dates of Existence
1898–present
Historical Names
- Department of Economic Science (1898–1910)
- Department of Economics and Political Science (1910-1913)
- Department of Applied Economics and Social Science (1913–1924)
- Department of Economics, History and Sociology (1924–1931)
- Department of Economics and Sociology (1931–1967)
Related Units
- College of Agricultural and Life Sciences (parent college)
- College of Liberal Arts and Sciences (parent college)
- College of Business (parent college)
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Abstract
Commodity options are currently illegal in the United States but the Commodity Futures Trading Commission is trying to initiate a pilot trading program. The success of a trial trading period depends very heavily on the type of option market established, trading rules and regulations, and how well options perform as a hedging mechanism. This study addresses the details of buying and granting calls, puts, and doubles while discussing the major problem areas facing the commodity option market. A simulation model is developed to create a synthetic options market for live cattle futures to test if options can be an alternative to traditional hedging;The economic viability of options as hedges is the crucial problem facing the development of an option market. Research results from simulated synthetic options market show that, under certain mechanical filters, option hedges are superior and at least as good as futures hedges in terms of gross mean returns and variance. Double options appear to be inferior to futures hedges when premium values approach 20 percent or more of the striking price;Specific policy recommendations are made based on the simulation results regarding whether a pilot program is feasible and the particular make-up of the trading program.