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1. Risk, risky behavior, risk assessment, risk management, insurances, futures market, negative corelation returns
Risk reponse types
Once we have identified and measured risk – what to do? How can we manage risks on farms and in agribusinesses? Risk management = different responses to risk
Risk management instruments/tools
COMPARING INSURANCE MEASURES (ODENING (ordening?))
Disaster insurance:
Revenue insurance:
Index based insurance:
•– basis risk (indemnification in loss event uncertain)
• + Also insures less severe situations
• + low transaction costs
• + low moral hazard costs
Trial exam 2025 Q1.4
practical 2 A1
A1: Risk measures
You are given two portfolios. They are characterized with the probabilities that potential returns are achieved as follows:
Portfolio | Expected Return
-15%
-10%
-5%
0
5%
10%
15%
20%
25%
30%
35%
P1
5
8
12
16
18
16
12
8
5
0
0
P2
0
0
25
35
10
7
9
5
3
3
3
There are no rows in this table
This reads as follows: with Portfolio 1 (P1), a return of -15% is achieved with a 5% probability.
a) Which portfolio would you prefer? Which would you describe intuitively as more risky?
practical 2 A3
practical 2 A4
True/False and Multiple Choice
1. Adverse selection is a problem caused by asymmetric information.
T ➔ individuals most at risk buy most insurances extend of high-risk share is
not known by insurer a priori
2. Future contracts are contracts that give the right to the buyer to buy or sell
futures contracts at specified price on or before the expiry date of the future
F ➔option
3. Futures markets main function is:
a. To facilitate the management of price risk.
b. To provide a source of decision making.
c. To aid producers and firms in discovering forward prices.
d. All of the above.
4. Private insurance markets develop if:
a. Participating agents have systematic risks.
b. Information to estimate probability and cost of risky event is available
among all agents.
c. Low frequency of risk occurrence.
5. What are potential risk management strategy for the case with the high frequency
and large impact?
Risk Management in the Agribusiness
a. Transfer/Share
b. Avoid
c. Accept
d. Reduce
A4: Futures Markets
Consider the following scenario:
• Current date (t0): November 1
• At the CBOT Soft Red Winter (SRW) wheat futures contract for July are sold at:
$5.50/bushel
• You believe that the actual price in July will be $4.00/bushel
1. Knowing the information that you know, which position should you take?
2. Suppose the price in July is really $4.00/bushel. Suppose you trade ten (10) July
contracts. Explain according to your decision in 1 the transactions you make on the
futures and spot market if dealing with 5,000 bushels per contract.
Solution:
1. Short -- sell a contract: benefits when the price drops
2. November: Sell wheat contracts for $5.50*10*5,000 =
$275,000 July: Sell wheat on spot market for
$4.00*10*5,000 = $200,000
Buy on the futures market a contract for July
=> Profit: =$275,000-$200,000 = $75,000
Spot market Futures market Price
November → sell 10 contracts =
50,000 bushels
Price for July:
$5.50*10*5,000=$275,000
July → sell 10
contracts =
50,000 bushels
→ buy 10 contracts =
50,000 bushels
Price:
$4.00*10*5,000=$200,000
Revenue: $200,000 $75,000 (=$275,000-
$200,000)
Net
Profit/Loss:
$275,000
2017 exam Q5 Risk Management
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