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Pricing an OTC Basket Option to Manage Cattle Price Risk in Canada: Comparing the Cost of COPP and of a CME-Based "2 Legs" Strategy

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  • Braga, Francesco

Abstract

A put option covering the risk of a decrease in the Canadian dollar value of a U.S. live cattle futures price is offered over the counter to Canadian cattlemen. The empirical results confirm that the pricing of the over the counter derivative is consistent with prevailing market conditions, and this, thanks to the low correlation between currency and live cattle price fluctuations, reduces the cost of this instrument to approximately 80% of the total cost of a portfolio consisting of one CME Canadian dollar call and one CME live cattle put.

Suggested Citation

  • Braga, Francesco, 1997. "Pricing an OTC Basket Option to Manage Cattle Price Risk in Canada: Comparing the Cost of COPP and of a CME-Based "2 Legs" Strategy," 1981-1999 Conference Archive 285682, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:nc8191:285682
    DOI: 10.22004/ag.econ.285682
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