A 6-month forward contract for corn exists with a price of $1.70 per bushel. If

Question

A 6-month forward contract for corn exists with a price of $1.70 per bushel. If Farmer Jayne decides to hedge her 20,000 bushels of corn with the forward contract, what is her profit or loss if spot prices are $1.65 or $1.80 when she sells her crop in 6 months? Her total costs are $33,000. 5. S0 loss or $3,000 loss $1,000 gain or $1,000 gain A) $1,000 gain or $1,000 loss C) D) B) S0 gain or $3,000 gain Two 6-month corn put options are available. The strike prices are $1.80 and $1.75 with premiums of S0.14 and $0.12 (per bushel), respectively. Average total costs are $1.65 per bushel to produce and 6-month interest rates are 4.0%. Farmer Jayne wishes to hedge 20,000 bushels output for 6 months. What is the highest profit or minimum loss that can be achieved using either one of the two options if the spot price in 6 months is $1.70 per bushel? 6. A) $88 loss B) $88 gain c) $496 loss D) $496 gain Corn call options with a S1.70 strike price are trading for a So.15 premium. Farmer Jayne decides to hedge her 20,000 bushels of corn by selling short call options. Six-month interest rates are 4.0% and she plans to close her position and sell her corn in 6 months. Her average total cost for corn is $1.65 per bushel. What is her profit or loss if spot prices are $1.60 per bushel when she closes her position? 7. A) B) $1,000 loss $2,000 gain C) $2,120 loss D) $2,120 gain

Explanation / Answer

Answer a)

Gain = forward Price * 20000 - cost = $1.7*20000 -$33000 = $1000

Loss = 0

Option D : $1000 gain or $1000 gain.

Answer 2) Put option provides right to sell,

Required price = cost + interest = 1.65 * (1+0.04) = 1.72

In the case , profit or loss = Strike price - required Price - Cost of Put

For 1st Put , profit or loss = ($1.80 - $1.72 - $0.14 ) * 20,000 = -$1200

For 2nd Put, profit or loss = ($1.75 - $1.72- $0.12 ) * 20,000 = -$1800

Althought None in the option :

Answer 3)  Short Call ,obliged you to buy the underlying asset at a fixed price in the future.

Call profit = premium recieved = O.15*20000 =3000

Change in price = 1.70- 1.60 *20,000 = 2000.

Loss = 3000-2000 = 1000 loss ,

Option A.

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