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Wheat options for consumers

‘I want protection against rising prices, but I’d also like to benefit if prices fall.’

Your need
You are a consumer (buyer) of wheat and would like to have protection against rising wheat prices but also the opportunity to benefit if prices fall.

Solution
A wheat option allows you to remain at a floating commodity reference price, while being protected should commodity prices rise above the agreed maximum price (call strike price), in return for paying a premium.

How it works
After credit approval, you enter into a wheat option with the Bank. You will specify the call 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 higher than the call strike price, we must pay you the difference between the call strike price and the commodity reference price
  • If the commodity reference price is equal to or below the call strike price, you and the Bank will have no further obligations to each other with respect to the wheat option. You can buy physical wheat at a price that is equal to or more favourable than the call strike price

 

Benefits

  • You receive protection against any rise in the commodity reference price above the agreed call strike price and have the potential to benefit if prices fall
  • You can determine the call strike price, transaction amount and exercise date/s
  • The transactions are cash settled so there is no need to physically deliver wheat 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 wheat 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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