Dairy Futures and Options Tutorial

Introduction to Commission Costs

In the previous examples of short and long hedges you established an expected selling price and purchase cost, respectively. In these formulations you ignored costs associated with the purchasing or selling of futures contracts. Incorporating these commission costs decreases the net selling price or increases the net purchase cost. The following example of short and long hedges show these impacts. You should note that when completing this worksheet we are assuming a constant basis.

Net Selling Price Established Through a Short Hedge with Commission Costs

Sell Futures Contract
Expected Basis
Broker's Commision
Expected Net Selling Price

Net Purchase Price Established Through a Long Hedge with Commission Costs

Purchase Futures Contract
Expected Basis
Broker's Commision
Expected Net Purchase Price

Note that in the above examples we have assumed away any basis risk. The actual net selling or purchase price will depend on the actual basis obtained.