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MINIMUM PRICE OPTION CONTRACTING

Overview

The setup and entry of a minimum price contract along with the setup and creation of an accompanying option contract will be explained in this document. There are users who record minimum price contracts and track the option contract purchased for their customer by a reference number.

Minimum Price contract setup

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The Minimum Price Contract Setup will be done by accessing the Contract Type: 1) General Information screen at Setup Information / Contract Types / Insert. Enter a Contract Type code & Description. Priority Level will likely be 2 and the Hedge Position Category will be 1) for Priced/Basis (Affect Basis Position If Unpriced). A Unique Number Range is suggested for the minimum price contracts.

The Available Fields – Purchase screen shows the setup suggested for minimum price contract entry.

The Price Formulas ----Purchase screen should include the Premium Price and any broker or service fee the A) Schedule Price formula for the Option Contract type.

Option contract setup

The Options Contract Setup will be done by accessing the Contract Type - General Information screen at Setup Information / Contract Types / Insert. Enter a Contract Type code & Description. Priority Level will be 14 and the Hedge Position Category will be 4) for Call Options and 5) for Put Options. A Unique Number Range is suggested for the option contracts.

The Available Fields – Purchase screen shows the setup required for single screen contract entry for Call Options.

Deltas are expressed as a percentage of the hedge-able quantity in the system. For example, because of the relationship of the current futures price to the strike price of a given option, the delta may be 1.5 meaning that a single option (5,000 bushels) effectively hedges 7,500 bushels of grain.

The Price Formulas ----Purchase screen should include the Premium Price and any broker or service fee the A) Schedule Price formula for the Option Contract type.

Entering the Minimum Price Contract

Enter the minimum price contract type, commodity, and contract name id.

Enter the board name, futures month, futures price, basis, premium price, strike price, service fee (if any), delta of 1.0 (optional as will be entered and valued in the options contract), expire date, price (calculated with arrow button), and minimum price.

Entering the Call Option contract

Start the contract entry. Contracts / Contract Maintenance / Add New Contracts

Enter a Call or Put as a purchase contract.

Enter the Contract Type for the Call or Put Option, Commodity Code, Broker Name ID, Option quantity, Broker trade reference number in Their Contract # if available, Option Expiration date, Board Name, Futures Month, Option Premium paid, Strike Price of the option, any service fee or broker fee, Delta of 1.0 unless different percentage relationship of current futures to the strike price.

The Call or Put Option will reflect in the Hedge/Futures portion of the Hedge Position Report.

Creating a payable for the cost of the option contract.

Settlement / Produce a Settlement and enter the Purchase, Commodity, and Broker Name ID.

Select 2) Advance Settlement

Enter Advance Option 2=Open Contract. (Current Cash Price is not necessary)

Enter the Option Contract to record the premium in payables.

Select the option contract.

The Option contract schedule price (premium plus any fees) will display in the Price field.

Change the Advance % to 100.00 and leave the quantity as stated.

The Option Advance Amount will display including any added fee.

Continue to the next screen.

No Other Deductions should be added.

Note: If the contract is in the name of the broker (hedge firm) and they have a unique name id type then you could map the advance to a unique ledger account based on the name id type, possibly by commodity.

Select Update/Print Settlement

Create an A/P Voucher

Sell, exercise, or cancel expired option contracts

Contracts / Cancel Contracts

Enter the Commodity, Broker ID, and Contract Number.

Select the Options Contract

Select OK

Enter the Premium Price and zero out the Service Fee unless there is another fee for selling the option. Click the main Price button to recalculate.

The cancellation process will remove the option from the HPR.

Posting the new premium provides a netting of the cost of the option.

Create a delivery sheet. Yes

The option contract has been changed from A active to X cancelled.

Select Back.

Produce the settlement. Yes

Include the original advance amount. OK

Create the invoice that nets the difference between the original option purchase and the sale premium.