Hedging financial and business risks in agriculture with commodity‐linked loans
Abstract
One of the particular problems facing agribusiness firms is the relationship between commodity price risk (a source of business risk) and debt repayment ability (a source of financial risk). This study examines the use of commodity‐linked loans applied to agricultural credits. A commodity‐linked loan is a credit instrument whose payoff is contingent on the value of an underlying commodity or portfolio of commodities. The payoff structure includes an option (call or put) rider that provides a payoff if the commodity price rises above or drops below a preset strike price. The payoff is applied directly to the loan. This study introduces the general concept, reviews the literature, and develops and applies a particular model. Simulation results illustrate the interrelationship between options payoffs, strike prices, volatility, and downside financial risk reduction.
Keywords
Citation
Jin, Y. and Turvey, C.G. (2002), "Hedging financial and business risks in agriculture with commodity‐linked loans", Agricultural Finance Review, Vol. 62 No. 1, pp. 41-57. https://doi.org/10.1108/00214870280001128
Publisher
:MCB UP Ltd
Copyright © 2002, MCB UP Limited