An Application of Risk Contingent Credit Applied to New York Dairy Farms with U.S. Options on Class III Milk Futures

25 Pages Posted: 25 Feb 2011

See all articles by Calum G. Turvey

Calum G. Turvey

Cornell University - School of Applied Economics and Management

Cao Yu

Cornell University

Date Written: February 23, 2011

Abstract

This paper addresses the financial risks faced by New York dairy farmers by discussing and developing prescriptive risk-contingent operating and mortgage loan contracts. It is argued that structured credit products with an imbedded contingent claim or price put option can effectively reduce or eliminate financial risks by providing payouts that reduce the amount of principal and/or interest that the farmer must repay under low price states. Formulas for risk-contingent operating and mortgage loans are developed and simulated.

Keywords: Risk-Contingent Credit, Contingent Claims, Agricultural Finance, Class III Milk Options

JEL Classification: G13, G21, G32, Q12, Q14

Suggested Citation

Turvey, Calum G. and Yu, Cao, An Application of Risk Contingent Credit Applied to New York Dairy Farms with U.S. Options on Class III Milk Futures (February 23, 2011). Available at SSRN: https://ssrn.com/abstract=1769044 or http://dx.doi.org/10.2139/ssrn.1769044

Calum G. Turvey (Contact Author)

Cornell University - School of Applied Economics and Management ( email )

248 Warren Hall
Ithaca, NY 14853
United States

Cao Yu

Cornell University ( email )

Ithaca, NY 14853
United States

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