Modeling of Price

• As revenue is given by price times yield, farmers ’ income risk comes from risk in yield and output price. Their net profit also depends on input price, but output price consists of the major price risk faced by farmers. • Incorporation of price risk into decision making process is fundamentally important. Both historical price information and projected future price come into play. Due to the usual lengthy gap between planning and harvest, expected price is the dominant factor. Given that many agricultural commodities are represented in the future and option markets, it is a common practice to infer the collective belief of future price movement from option pricing. • An European call option, the right (but not obligation) to buy at a future maturity time τ at a (strike) price X, is fairly priced according to c(X; τ) = e−r