Question

Suppose that you know today that you will be selling 15,000 bushels of corn a few months from now. Additionally, you know that given the current cash price of $2.35/bu., you have the potential to profit. However, you are concerned that the price may move against you. You purchase a $2.50/bu. put option for $0.20/bu. and expect the basis to be $0.05 under. When you are ready to sell the corn, the cash and futures prices have decreased to $2.15/bu. and $2.20/bu., respectively. Assuming zero time value and that the broker charges a commission of $50 per option traded, answer the questions below.

I need help with question E-H please! This is all the info given!

- What are you trying to protect against?

We are trying to protect against the risk that the price of corn could go down in the future. Therefore, we could have a loss when selling it.

- What do you call the price of $2.50/bu. of a put option?

We call the price of $2.5/bu the strike price of the put option.

- What do you call the price of $0.20/bu.?

We call the price of $0.20/bu the premium paid by the buyer of the option.

- Is your put option in-the-money/at-the-money/out-of-the-money after the price changes, and why?

The put option is in-the-money as it is beneficial for the buyer of the option to exercise the option.

- What is the number of option contracts needed to fully protect your 15,000 bushels?

- What is the total amount that you have to pay to purchase the necessary put options?

- What is the basis equal to after the price change?

- Compute the target price.

Answer #1

Happy reading. Stay safe!!

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