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Are Corn and Soybean Options Too Expensive?

Author

Listed:
  • Urcola, Hernan A.
  • Irwin, Scott H.

Abstract

A growing body of recent evidence suggests that premiums for financial options might be too high. For agricultural options, market participants often make similar claims, however there is very limited scientific literature to prove or disprove such claims. This research investigates the efficiency of corn and soybean options markets by directly computing trading returns. Time effects on market efficiency are also investigated. When the sample period is considered as a whole, risk adjusted returns indicate that no profits can be made by taking either side of the corn or soybean options markets. However, when time effects are analyzed, corn calls appear to have provided excess returns during the 1998--2005 period. This result do not appear to be driven by movements in the underlying futures, since similar differences were not found for corn puts. Based on the evidence presented here, corn puts and soybean options would constitute fairly-well priced insurance tools. Further research should investigate the causes of corn call returns.

Suggested Citation

  • Urcola, Hernan A. & Irwin, Scott H., 2006. "Are Corn and Soybean Options Too Expensive?," 2006 Conference, April 17-18, 2006, St. Louis, Missouri 19006, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  • Handle: RePEc:ags:ncrsix:19006
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    File URL: http://purl.umn.edu/19006
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