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
Max Payout: $100,000
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.