AGRICULTURAL COMMODITIES DERIVATIVES MARKETS
Learning outcomes of the course unit
The course is organized around six key themes:
• Fundamental analysis of agricultural commodity markets;
• Origins of futures and options trading;
• Market mechanics and regulation of Commodities Exchanges;
• Speculators and hedgers: objectives and operational behaviour;
• Price and basis risk;
• Hedging ratio and effectiveness.
The course, first and foremost, is to provide the tools to interpret the evolution of the futures markets and to understand the mechanics. Particular attention is devoted to evaluating the effectiveness of hedging, which measures how much of the price risk can be reduced by using derivatives.
a. At the end of the course students will have acquired the knowledge necessary to understand both the mechanism by which an enterprise of the food system can hedge the price risk and the context in which the derivatives are operating.
b. On the basis of the topics, the student will be able to apply the acquired knowledge in order to carry out price risk management decisions consistent with the characteristics and needs of the company of the agri-food system where he (she) will be employed.
c. At the end of the course, the critical thinking skills (independent judgment) will enable the student to deal with the corporate finance in a broader perspective than purely operational, being able to understand the dynamics that occur at the supply chain level too.
d. The ability communication skills developed will allow to use a consistent technical language and to work in teams in order to interact with various functional levels provided for by the company.
e. The study method also passes through the design and development of an hedging project with presentation to colleagues and classroom discussion. These activities are designed to enhance the ability to learn by applying a logical method to identify problems and to criticize analysis of the solutions adopted.
Course contents summary
The focus of the course is on the size and characteristics of the Commodity Exchanges with particular reference to the contractual mechanisms and their operations.
Futures markets perform several functions: they provide the instruments to transfer price risk, they facilitate price discovery and ultimately represent a new asset class for financial investors, such as fund and money managers who had not previously been present in these markets.
In the agri-food systems of developed countries, the financial derivatives, which have as their underlying agricultural products, have greatly increased their importance, not only because now regulate the formation of the prices of raw materials and food products, but also because they are an invaluable tool for the management of the price risk.
In this regard, the most effective choice of hedging must be modulated according to the type of enterprise: each category of agent which is present in the food chain has, potentially, an interest for price risk management, but hedging for each of them has different connotations and specific characteristics.
The main readings are the lesson notes from the course and texts selected by the
-Teaching materials for the course of Agricultural Commodities Derivatives Markets, Università degli Studi di Parma, Parma, 2012 (available at the photocopy service by the Dipartimento di Economia).
- S. Serra, M. Zuppiroli : Il commercio dei cereali, Edagricole – Edizioni agricole del Sole 24 ore, Milano, 2009.
- C.A. Carter : Futures and Options Markets. An Introduction, Waveland Press Inc., Long Grove, Illinois, 2007.
The teaching modalities are aimed to the training objectives set forth herein.
The course is based on frontal lectures concerning the general issues associated with the operation of agro-food markets and derivatives (knowledge, understanding and learning skills).
The teacher will illustrate the meaning of the most common terms involved in the financial markets of food commodities (communication skills).
The ability to apply knowledge will be assessed during some applications and the development of an hedging project to be carried out and discussed in the classroom with colleagues (applying knowledge). On these occasions it will be possible to ascertain the confidence in personal judgment and the ability to communicate with appropriate technical language.
Assessment methods and criteria
The assessment of students is done by a written test. The exam consists of open ended written questions .
The knowledge and the ability to communicate with the appropriate technical language will be assessed with three open-ended questions that will be assessed up to 10 points each.