Subsidized Options in a Thin Market: A Case Study of the Dairy Options Pilot Program Introduction

David Buschena and Kevin McNew

Review of Agricultural Economics, 2008, vol. 30, issue 1, 103-119

Abstract: We explore how a thin market responds to a subsidized put option program. The United States Department of Agriculture initiated the Dairy Options Pilot Program in 1999 in an effort to provide dairy producers with real-world experiences trading options. The volume from this program represented a large share of total trades. Our empirical analysis shows that Dairy Options Pilot Program trades occurred at statistically significantly high prices, Dairy Options Pilot Program volume had a price-reducing effect on other options trades, and some brokers filled Dairy Options Pilot Program orders at relatively high prices. We also find that these brokers appear to be providing acceptable service to their producer clients.

Date: 2008
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