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Cotton options for producers

‘I want protection against falling prices, but I also want to benefit if prices increase.’

Your need
You are a producer (seller) of cotton and would like to have protection against falling cotton prices but also the opportunity to benefit if the prices rise.

Solution
A cotton option allows you to remain at a floating commodity reference price, while being protected should commodity prices fall below the agreed minimum price (put strike price), in return for paying a premium.

How it works
After credit approval, you enter into a cotton option with the Bank. You will specify the put strike price, the transaction amount and the exercise date/s. We will determine the premium.

Possible outcomes on the pricing date

  • If the commodity reference price is lower than the put strike price, we must pay you the difference between the put strike price and the commodity reference price.
  • If the commodity reference price is equal to or above the put strike price, you and the Bank will have no further obligations to each other with respect to the cotton option. You can sell your physical cotton at a price that is equal to or more favourable than the put strike price.


Benefits

  • You receive protection against any fall in the commodity reference price below the agreed put strike price and have the potential to benefit if prices rise.
  • You can determine the put strike price, transaction amount and exercise date/s.
  • The transactions are cash settled so there is no need to physically deliver cotton to the Bank.
  • There are no complex exchange traded brokerage and margin calls.


Points to consider

  • You have to pay a premium to the Bank as an up-front payment.
  • You are not covered for the basis risk, which is the risk arising from entering into a hedge transaction that is not identical with the risk being covered.
  • The cotton option may expire worthless, resulting in the premium being an additional cost to you.



  • Important information about advice
    As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances. View our Financial Services Guide (PDF 59kb).
    View the Product Disclosure Statement (PDS) for Agricultural Commodity Risk Management Solutions issued by the Commonwealth Bank of Australia, and consider it before making any decision about the product(s).


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