HOW TO COUPLE CASH AND FUTURES PRICES: CASE STUDY ABOUT CORN PRICES (1/5)

When trying to hedge any commodity we always find that the price risk moves into basis risk. This means that we need to take under control the price differences (spot and forward) instead of the price itself. 

Basis = Cash Price - Futures Price

An extensive article about the basis in agriculture commodities: http://agebb.missouri.edu/mgt/risk/basis.htm 

We will use the historic cash prices for corn in northern Spain market and the futures fo Chicago coupled onto the first day of quotation. 

This is: july 2009, Corn futures 327 $/ton ~ 234,5 €/ton that same day. Cash bid was 159 €/ton.

We set them down to origin point (234,5/159 and the same for the rest of the serial). At this point we can see how the basis acts like cumulative error. It is not easy to hedge this charts.




For the perfect hedging, we want the charts to move parallely. How to find it?

(to be continued)

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