1) Six months from now, Farmer Joe will harvest 20,000 bushels of wheat. In doin
ID: 2617060 • Letter: 1
Question
1) Six months from now, Farmer Joe will harvest 20,000 bushels of wheat. In doing so, he incurs costs of $185,000. The current spot price of wheat is $9.70 per bushel, and the six-month forward price is $9.89. Suppose Joe decides to remain unhedged. What total profit would he earn if the market price of wheat at harvest time is $9.10, $9.50, $9.90, and $10.30, respectively?
a) $10,668; $18,668; $20,668; $20,668
b) $8,876; $8,876; $16,876; $16,876
c) $–6,668; $–6,668; $–668; $7,332
d) $–3,000; $5,000; $13,000; $21,000
e) $12,800; $12,800; $12,800; $12,800
2) Six months from now, Farmer Mandy will harvest 25,000 bushels of corn. In doing so, she incurs costs of $142,000. The current spot price of corn is $5.90 per bushel, and the six-month forward price is $6.02. Suppose Mandy decides to sell corn forward. What total profit would she earn if the market price of corn at harvest time is $5.30, $5.70, $6.10, and $6.50, respectively?
a) $3,560; $3,560; $13,560; $13,560
b) $–5,670; $–5,670; $1,830; $11,830
c) $8,500; $8,500; $8,500; $8,500
d) $–9,500; $500; $10,500; $20,500
e) $–830; $9,170; $11,670; $11,670
3) Six months from now, Farmer Dawn will harvest 15,000 bushels of wheat. In doing so, she incurs costs of $138,000. The current spot price of wheat is $9.50 per bushel, and the effective six-month interest rate is 5 percent. Dawn has decided to hedge by purchasing put options on 15,000 bushels of wheat with a strike price of $9.50 per bushel. The puts have a premium of $0.49 per bushel. What total profit would she earn if the market price of wheat at harvest time is $8.90, $9.30, $9.70, and $10.10, respectively?
a) $–3,218; $–3,218; $–218; $5,783
b) $3,218; $9,218; $12,218; $12,218
c) $–4,500; $1,500; $7,500; $13,500
d) $11,700; $11,700; $11,700; $11,700
e) $8,273; $8,273; $14,273; $14,273
Explanation / Answer
(1) Total Profit = 20000 x Price per Bushel after 6-months(P) - harvesting cost.
Therefore, when P = $ 9.1, Total profit = 20000 x 9.1 - 185000 = - $ 3000
Similarly, Total profit = 9.5 x 20000 - 185000 = $ 5000
Total profit = 20000 x 9.9 - 185000 = $ 13000
Total profit = 20000 x 10.3 - 185000 = $ 21000
Hence, the correct option is (d).
NOTE: Please raise separate queries for solutions to the remaining unrelated questions.
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