Name Yeshambel Ewunetu

ID No BDU/1208143
Agriculture and commodity final exam
Questions and answer
1. Define agricultural marketing on your own words. What are the characteristics of
agricultural marketing? Explain your answer using examples.
Agricultural marketing is a form of marketing that includes all goods and services related to the
field of agriculture. It is the process of moving agricultural products from the initial point of
production to the final point of consumption. It is a series of services involved in moving a
product from the point of production to the point of consumption. It has various characteristics.
These are:
 Different pricing from others consumer product
 Product variety is size and quality
 Agricultural marketing being from nature
 Specialized production firm
 Channel members
 Bulkiness
 Transportation cost
 Sales promotion needed
 Storage needed
 Collaboration with demand and supply
2. Agricultural marketing involves a number of interconnected serious of activities.
Explain those activities in Ethiopian context using ‘Teff’ as an example.
Growing and harvesting the process of preparing and cultivating the product activity
Planning production is the process of designing the necessary inputs for agriculture
Grading, Grading is the process of sorting products according to their quality.
Packing, The activities or designing and producing the container or wrapper for a
product.
Transport, the movement of product from point of origin to point of use or consumption and
perhaps their return as well.
Storage is the holding of produce from time of production until needed by the consumers.
Agro- and food processing it includes agricultural products and food items
Distribution and sale the way of marketing and selling
3. How does the marketing system work in food marketing? Explain your answer using
Examples
The marketing system is work in in food marketing in different ways. Example in Supermarket,
Corporate Driven Food Chains, and Cooperatives/Producer The marketing system provides the
link between farms and consumers. The marketing system adds value in food manufacturers
take agricultural commodities and change their form into something more desirable to the
customer, added value to assembling products that are geographically distant from population
centers and making them easily accessible to consumers, adds value through activities that
facilitate ownership transfer as products move from the farm to the consumer. Or it works
through intermediaries or channels.
4. Explain about Agriculture Internet of Things (IoT) and Connected Agricultural
Services. Is there any possibility to apply it in this system in Ethiopia? How/Why not?
Agriculture Internet of Things (IoT) and Connected Agricultural Services is based on smart
farming, a system of built for monitoring the crop field with the help of sensors (light, humidity,
temperature, soil, moisture, etc.) and automating the irrigation system. The farmer can monitor
the field conditions from anywhere. It ensures data flows between sensors and other devices,
making it possible to add value to the obtained data by automatic processing, analysis and
access, and this leads to timelier and cost-effective production and management effort on farms.
It is impossible to apply in Ethiopia due to scarce resources and limited technology and poor
knowledge of producers in Ethiopia. For this reason, the following are major challenges:
• Information is available with time lag
• Information is not linked to local grades and standards
• Price range is available, little use to farmers
• Needs interpretation of price data / information to make better decisions
• Gap in effective use of information by farmers or by extension functionaries.
5. Differentiate Forward, Future, and SWAP. Explain how those derivatives can be applied
in Ethiopia.
Forward is an agreement to buy or sell an asset at a certain time in the future for a
certain/predetermined price. It is trade in the over-the-counter market. It is the Private contract
between two parties, not standardized, usually one specified delivery date Settled at end of
contract, Delivery or final settlement usual and some credit risk while Future is an agreement to
buy or sell an asset at a certain time in the future for a certain price. It is traded on exchanges.it is
Traded on an exchange, Except price The Quality, quantity and delivery are more standardized,
Range of delivery dates, Settled daily ,Usually closed out prior to maturity And Virtually no
credit risk
Swap is a derivative contract through which two parties exchange the cash flows or liabilities
from two different financial instruments. It involve cash flows based on a notional principal
amount such as a loan or bond. The most common kind of swap is an interest rate swap. It is not
trade on exchanges and retail investors do not generally engage in swaps. Generally these
derivatives are applied in Ethiopia in different ways, Future and forward contract applied in
Ethiopian commodity exchange through spot market and swaps applied in bonds and different
interest.
6. What is hedging? Why do we hedge? Explain the differences and applications of short and
long hedges
Hedging means protection. It is a trading technique of transferring the price risk. Hedging is the
practice of buying or selling futures to offset an equal and opposite position in the cash market
and thus avoid the risk of uncertain changes in prices. We hedge, to protect the risks or to
balance the ups and downs of the cash market price and future price and to take a futures
position that is equal and opposite to a position held in the cash market.
The difference between short and long hedge, Short hedge is a hedge, such as the one just
described, that involves a short position in futures contracts. It is appropriate when the hedger
already owns an asset and expects to sell it at some time in the future. For example, a short
hedge could be used by a farmer who owns some wheat and knows that they will be ready for
sale at the local market in two months. While Long Hedges is involves taking a long position in
a futures contract. It is appropriate when a company knows it will have to purchase a certain
asset in the future and wants to lock in a price now.
7. What are derivatives? What are their applications in a given market?
Derivative are an instrument whose value depends on the values of other more basic underlying
variables. Derivatives are instruments that includes Basic instruments (Forward contracts and
Options) and Hybrid instruments (Futures contracts and Swaps). A derivative is a contract
between two or more parties whose value is based on an agreed-upon underlying financial asset,
index or security. Derivatives are applied in the exchange of different agreements between the
company, the consumer and producer like in future contract, in forward contract and in swaps.
8. What is option? Explain the differences between put option and call option and explain
their applications in Ethiopia using at least one example for each.
Option is the right but not the obligation to buy or sell something at a specific predetermined
price at any time within a specified time period. The differences between put option and call
option is, put option is gives the holder the right to sell an asset by a certain date for a certain
price. In put option the seller of the put must deliver the holder with the specified short futures
position. Example, Now, think of a put option as an insurance policy. If you own your home,
you are likely familiar with purchasing homeowner’s insurance. A homeowner buys a
homeowner’s policy to protect their home from damage. They pay an amount called the
premium, for some amount of time, let’s say a year. The policy has a face value and gives the
insurance holder protection in the event the home is damaged.
While call option is gives the holder of the option the right to buy an asset by a certain date for
a certain price. In call option the seller of the call option must provide as the holder with the
specified long futures position. Example, A potential home owner sees a new development
going up. That person may want the right to purchase a home in the future, but will only want to
exercise that right once certain developments around the area are built.
9. What are the conditions under which in –the- money, out of- the -money and at-the
money happen?
1. in-the money an option with intrinsic value.
2. Out-of-the-money An option that doesn’t have intrinsic value.
A put option with a strike price below the underlying futures price (basically, the right to sell
low) is out-of- the-money.
A call option with a strike price above the underlying futures price (basically, the right to buy
high) is also out-of-the-money.
3. At-the-money. If the strike price and underlying futures price are equal
Or
In the money
Call option: Futures price > Strike price
Put option: Futures price < Strike price
Out of the money
Call option: Futures price < Strike price
Put option: Futures price > Strike price
At the money
Call option: Futures price = Strike price
Put option: Futures price = Strike price
Or
An at-the-money option is one that would lead to a zero cash flow to the holder if exercised
immediately, i.e. the price of the underlying commodity equals the option’s strike price.
An in-the-money option is one that would lead to a positive cash flow to the holder if exercised
immediately, i.e. the price of the underlying commodity is more than a call option’s strike price
and less than a put option’s strike price.
 An out-of-the-money option is one that would lead to a negative cash flow to the holder if
exercised immediately, i.e. the price of the underlying commodity is less than the call option’s
strike price and more than the put option’s strike price.
10. Assume that you purchase February 30 /2020 wheat call with a strike price of Br 30 per
kilogram and premium of 5birr per kilogram. If the actual market price of the February
wheat becomes Br 29, will you exercise the option? Why or why not? What if the February
wheat price becomes 31? Will you change your decision? Why or why not?
The call option does not exercise because the price wheat is going down to 29 and the decision is
not change. But if the February price is 31 the call option is exercise because the actual price is
changed and the decision will be change.