Here is an example of a CWB Client using CALL options to protect their exposure.

Client A – Corn & Soybean Farmer

Location:  North Central, Iowa

Average Rainfall for May:  4.5”

Risk:  Too much rainfall (delay in planting)

Client A located in North Central, Iowa was concerned that excessive rainfall during the month of May may cause his crops to be planted late.  A late crop means late maturity and thus can expose crops to a greater degree of frost risk during harvest.  The average rainfall over the last 20 years was 4.5” using the nearby co-op weather stations, but this client wanted to measure rainfall on-site using our proprietary weather gauges.

After a deep analysis in determining at what point the farmer would be at-risk, we determined a 7” binary call option was most appropriate.  This trade structure afforded our client a 5.3 to 1 fixed payout in the event cumulative rainfall exceeded 7” during the month of May. 

The trade that was presented is as follows:

Option Type:  Binary Call Option

Strike:  7”

Max Payout:  $100,000

Premium:  $19,000

Potential Profit:  $81,000

Potential Return:  426%

# of Occurrences (Last 10yrs):  1

At the end of May, the total rainfall was 10”.   The Client profited $81,000 which can be utilized to protect against a late crop and the risk associated with frost.