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The JSE offers alternative options for cost effective protection against price risk for maize farmers

December 10, 2013

Johannesburg, 10 December 2013. – The JSE has introduced short-dated options to give farmers and millers greater protection against fluctuations in the maize price.
These Short-Dated New Crop options (SDNC’s) follow the price of maize futures which will expire in July 2014, but the options themselves will be converted to futures at the end of March 2014 if they are at the price level that requires this.
“The short-dated options are cheaper because they have a shorter time horizon, but can provide farmers with greater protection against fluctuating prices specifically during the crucial growing season when the weather can make the maize market particularly volatile,” says Chris Sturgess, Director of Commodity Derivatives at the JSE.
“We are very excited about the new short-dated options contract, as it offers all sorts of new trading and hedging opportunities. We are committed to offering liquidity to the options market as best we can,” says Gulf Wolff, trader at Corn International.
Maize options are contracts that give the buyer the choice, but not the obligation, to buy or sell his maize at a certain price at a certain date in the future. A put option represents an opportunity to sell, while a call option represents an opportunity to buy. Farmers in the maize market will therefore make use of put options, while millers will use call options.
Farmers use put options to fix the minimum price at which they will sell their maize. If by March the market price of maize has climbed higher than the fixed price on the option, the farmer can choose not to exercise the option and instead sell his maize at the higher market price. But if the market price has fallen below the fixed price, also known as the strike price on the option, the JSE will exercise the option by converting it into a futures position to expire in July and the farmer can still sell his maize at this higher fixed price.
In order to have this freedom where a floor (put option) or ceiling (call option) price is fixed by the buyer of the option, the holder of the option must pay a premium. This means that options are more expensive than trading outright futures contracts where the holder has no choice but to buy or sell. However, if the holder of the option chooses not to exercise it, this premium is his only cost.
Sturgess says the short-dated options can lower the cost of hedging considerably because the premium farmers have to pay to hold these options are much lower than the premium on their longer dated counterparts.
“If July futures are trading at around R2050 per ton, a standard put option to sell maize just before July costs around R140 per ton. A short-dated put option expiring in March would only cost around R95 per ton.”
For more information on trading short-dated new crop options contact email commodities@jse.co.za or call +27 11 520 7535:

About JSE Limited
As South Africa’s only full service securities exchange, the JSE connects buyers and sellers in five different financial markets, namely equities, equity derivatives, commodity derivatives, currency derivatives and interest rate products. The JSE Ltd offers the investor a truly first world trading environment, with world class technology, surveillance and settlement in an emerging market context. It is amongst the top 20 largest equities exchanges in terms of market capitalisation in the world. In terms of derivatives, the JSE is currently ranked the 20th largest exchange by the Futures Industry Association (FIA).
For further information, please visit www.jse.co.za/commodities

ISSUED BY:
Victoria Williams / Mari Blumenthal
H+K Strategies South Africa
Tel: + 27 11 463 2198
Email: Victoria.williams@hkstrategies.co.za  / mari.blumenthal@hkstrategies.co.za  

ON BEHALF OF:
Chris Sturgess
Director of the Commodities Division
JSE Limited
Tel: + 27 11 520 7299
Email: chriss@jse.co.za