I Question 4 0 out of 1I points Six months from now, Farmer Julie will harvest 2

Question

I Question 4 0 out of 1I points Six months from now, Farmer Julie will harvest 20,000 bushels of corn. In doing so, she incurs costs of $100,000. The current spot price of corn is $5.50 per bushel, and the effective six-month interest rate is 2 percent. Julie has decided to hedge by purchasing put options on 20,000 bushels of corn with a strike price of $5.50 per bushel. The puts have a premium of $0.54 per bushel. What total profit would she earn if the market price of corn at harvest time is $4.90, $5.30, S5.70, and S6.10, respectively? Selected Answer: &d; $8,448; $8,448; $16,448; $16,448 a. S-2,000; $6,000; $14,000; $22,000 Answers: $9,016; $17,016; $21,016; $21,016 ?. $12,200; $12,200; $12,200; $12,200 d. S-1,016; S-1,016; $2,984; $10,984

Explanation / Answer

Statement showing Profit and loss

Price as at expiry Particulars 4.90 5.3 5.7 6.1 Put option with strike price of $5.5 Exercise Exercise Not exercised Not exercised Profit on exercise of put option 0.60 0.20 0 0 Premium paid 0.54 0.54 0.54 0.54 Profit/loss per bushel 0.06 -0.34 -0.54 -0.54 Total bushel 20000.00 20000.00 20000.00 20000.00 Total Profit/loss 1200.00 -6800.00 -10800.00 -10800.00 LESS: interest loss[(20000*0.54)*2%) 216 216 216 216 Net profit/loss in option market 984.00 -7016.00 -11016.00 -11016.00 Add:Selling of bushel(20000*SPPU) 98000 106000 114000 122000 Less: cost 100000 100000 100000 100000 Total -1016.00 -1016.00 2984.00 10984.00

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