Fremar LLC

Mission Statement: TO ANTICIPATE, MEET OR EXCEED OUR PATRON'S EXPECTATIONS WHILE PROVIDING LOCAL PROFITABILITY.

Grain - Feed - Agronomy - Petroleum         605-648-3941 or Toll-Free: 800-658-3544, Fax: 605-648-3943
General Manager: Steve Domm                                                      Main Office Hours: Monday - Friday    7:30 AM - 5:00 PM
Main Office: 44608 - 273rd Street, Marion SD 57043                                                                             Closed Saturday & Sunday

	Contracts

BUYING PUT OPTIONS ON FUTURES AS A HEDGING ALTERNATIVE

FEATURES * Delivery at a Later Date * Futures Market Portion Priced at Time of Option Transaction Tied to a Strike Price Acting as a Price Floor * Basis Priced at a Later Date * Payment Received at Upon of Delivery of Grain; In Addition a Profit or Loss May be Realized from the Option Portion of the Transaction

DEFINITION

The buying of put options affords the seller of grain the right to sell (short) a futures contract at a predetermined price. The buying of put options however does not lock the seller of grain into a price in the event the futures market would rally. If the futures market rallies the buyer of an option can simply walk away not having to assume a short (sell) futures position, with no expense, other than the original cost of buying the option contract. This alternative is useful for locking in a desirable futures price for a crop that has not been planted or harvested.

ADVANTAGES

* Allows the seller the ability to lock-in a minimum futures market price for his product.

* Allows the seller the ability to walk away from a futures market sale in the event of a futures market rally.

* Allows the seller the ability to arbitrage delivery markets upon shipment.

* Allows the seller the ability to lock-in favorable futures market carrying charges when available.

DISADVANTAGES

* The buyer of the option contract must pay a premium for the flexibility that the option provides. This is a sunk cost.

* One continues to incur ongoing inventory and interest costs if the put is used as a hedge for stored grain inventories.

* The buying of options as a hedge does not eliminate the risk one has in the basis portion of the pricing.

EXAMPLE

It is February 1st and the November soybean futures are at $4.80. You call FREMAR and they are bidding $4.15 for October soybeans, which is 65 cents under the November. You like the futures level, but you feel the basis is historically wide. You could do a Hedge-To Arrive contract with FREMAR, but you are nervous about locking in bushels due to the price being below loan rate and you don't have any beans planted yet. You can buy a $4.80 November soybean put for $.25. By purchasing a put, you are buying the right to sell soybean futures at a certain price level, but you are not obligated to deliver any soybeans. You decide that you are willing to spend the $.25/bushel on the put and you instruct FREMAR to purchase it for your account.