Analysis of the Mechanism of “Basis Pricing+Option” Mode for Feed Enterprises to Avoid Raw Material Price Risk -- Taking Haid Group as an Example

Abstract

In 2020, the outbreak of COVID-19 epidemic impacted the corn supply.Louis Dreyfus Group, together with Haid Group, conducted corn trading in the mode of "basis pricing+option", and achieved good results. Based on the traditional hedging theory, the basis hedging strategy theory, the basis trade theory, the futures price discovery theory,this paper uses the case study method to illustrate three related questions:How ‘‘basis pricing+option"mode helps Haid Group avoid price risk, and how this mechanism works; Advantages of the mode in risk avoidance for feed enterprises; And an analysis of the risks and defects of the mode. The research finds that the feed enterprises could avoid price risk through the "basis pricing+option" mode by locking the basis in advance to reduce the absolute risk --- calculating the option strike price according to the futures prices on the basis agreement date, setting the highest transaction price --- confirming whether to exercise the option given according to the futures price on the final pricing date. Compared with traditional hedging, the advantage of the basis point price+option model is that feed enterprises and grain traders form long-term cooperation,reduce the trade costs and shorten procurement circle of feed enterprises, and give feed enterprises the initiative and flexibility to choose the purchase price and time.However,the mode would not be perfect, and strict counterparty credit review is required to avoid exposure risk before the final pricing date.