Rapeseed Futures Trading Basics

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Contents

Rapeseed Futures Trading Basics

Rapeseed futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of rapeseed (eg. 50 tonnes) at a predetermined price on a future delivery date.

Rapeseed Futures Exchanges

You can trade Rapeseed futures at NYSE Euronext (Euronext).

Euronext Rapeseed futures prices are quoted in dollars and cents per metric ton and are traded in lot sizes of 50 tonnes .

Exchange & Product Name Symbol Contract Size Initial Margin
Euronext Rapeseed Futures
(Price Quotes)
ECO 50 tonnes
(Full Contract Spec)
EUR 1,300 (approx. 9%)
(Latest Margin Info)

Rapeseed Futures Trading Basics

Consumers and producers of rapeseed can manage rapeseed price risk by purchasing and selling rapeseed futures. Rapeseed producers can employ a short hedge to lock in a selling price for the rapeseed they produce while businesses that require rapeseed can utilize a long hedge to secure a purchase price for the commodity they need.

Rapeseed futures are also traded by speculators who assume the price risk that hedgers try to avoid in return for a chance to profit from favorable rapeseed price movement. Speculators buy rapeseed futures when they believe that rapeseed prices will go up. Conversely, they will sell rapeseed futures when they think that rapeseed prices will fall.

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Hedging Against Falling Rapeseed Prices using Rapeseed Futures

Rapeseed producers can hedge against falling rapeseed price by taking up a position in the rapeseed futures market.

Rapeseed producers can employ what is known as a short hedge to lock in a future selling price for an ongoing production of rapeseed that is only ready for sale sometime in the future.

To implement the short hedge, rapeseed producers sell (short) enough rapeseed futures contracts in the futures market to cover the quantity of rapeseed to be produced.

Rapeseed Futures Short Hedge Example

A rapeseed farmer has just entered into a contract to sell 5,000 tonnes of rapeseed, to be delivered in 3 months’ time. The sale price is agreed by both parties to be based on the market price of rapeseed on the day of delivery. At the time of signing the agreement, spot price for rapeseed is EUR 292.50/ton while the price of rapeseed futures for delivery in 3 months’ time is EUR 290.00/ton.

To lock in the selling price at EUR 290.00/ton, the rapeseed farmer can enter a short position in an appropriate number of Euronext Rapeseed futures contracts. With each Euronext Rapeseed futures contract covering 50 tonnes of rapeseed, the rapeseed farmer will be required to short 100 futures contracts.

The effect of putting in place the hedge should guarantee that the rapeseed farmer will be able to sell the 5,000 tonnes of rapeseed at EUR 290.00/ton for a total amount of EUR 1,450,000. Let’s see how this is achieved by looking at scenarios in which the price of rapeseed makes a significant move either upwards or downwards by delivery date.

Scenario #1: Rapeseed Spot Price Fell by 10% to EUR 263.25/ton on Delivery Date

As per the sales contract, the rapeseed farmer will have to sell the rapeseed at only EUR 263.25/ton, resulting in a net sales proceeds of EUR 1,316,250.

By delivery date, the rapeseed futures price will have converged with the rapeseed spot price and will be equal to EUR 263.25/ton. As the short futures position was entered at EUR 290.00/ton, it will have gained EUR 290.00 – EUR 263.25 = EUR 26.75 per tonne. With 100 contracts covering a total of 5000 tonnes, the total gain from the short futures position is EUR 133,750

Together, the gain in the rapeseed futures market and the amount realised from the sales contract will total EUR 133,750 + EUR 1,316,250 = EUR 1,450,000. This amount is equivalent to selling 5,000 tonnes of rapeseed at EUR 290.00/ton.

Scenario #2: Rapeseed Spot Price Rose by 10% to EUR 321.75/ton on Delivery Date

With the increase in rapeseed price to EUR 321.75/ton, the rapeseed producer will be able to sell the 5,000 tonnes of rapeseed for a higher net sales proceeds of EUR 1,608,750.

However, as the short futures position was entered at a lower price of EUR 290.00/ton, it will have lost EUR 321.75 – EUR 290.00 = EUR 31.75 per tonne. With 100 contracts covering a total of 5,000 tonnes of rapeseed, the total loss from the short futures position is EUR 158,750.

In the end, the higher sales proceeds is offset by the loss in the rapeseed futures market, resulting in a net proceeds of EUR 1,608,750 – EUR 158,750 = EUR 1,450,000. Again, this is the same amount that would be received by selling 5,000 tonnes of rapeseed at EUR 290.00/ton.

Risk/Reward Tradeoff

As can be seen from the above examples, the downside of the short hedge is that the rapeseed seller would have been better off without the hedge if the price of the commodity went up.

An alternative way of hedging against falling rapeseed prices while still be able to benefit from a rise in rapeseed price is to buy rapeseed put options.

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Continue Reading.

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Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

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Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

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