PROBLEM 6 (50 points) Suppose that you know today that you will be purchasing a pen...

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PROBLEM 6 (50 points) Suppose that you know today that you will be purchasing a pen of segregate early weaned pigs a few months from now and that you will need 10,000 bushels of corn for feeding purposes. Additionally, you know that given the current corn cash price of $2.35/bu., you have the potential to feed-out these pigs for a profit. However, you are concerned that the corn price may move against you before you purchase the hogs. You purchase a $2.55/bu. call option for $0.30/bu. and expect the basis to be $0.05 under. When you are ready to purchase the hogs and corn to make feed, the cash and futures prices have increased to $3.00/bu. and $3.05/bu., respectively. Assuming zero time value and that the broker charges a commission of $50 per option traded, answer the questions below. h. Compute the target price. i. Compute the gain/loss per bu. you have earned on options in terms of the premium as a result of price change. The premium gain will be $0.30 per bushel Gain in money= $3.05-$2.55= $0.50 less premium paid =$0.30- ($2.55-$2.35)= $0.10 j. Compute the effective buying price (EBP), and by comparing it to your target price comment on whether it was a good deal. Effective Selling Price= Current cash price per bushel + Gain from options per bushel $2 k. Compute the overall gain/loss as a result of dealing with the options. Are you better/worse off as a result of dealing with options as opposed to not dealing with options at all, and why? Better off m. Give an example of a futures price that would render your call option out-of-the- money. PROBLEM 6 (50 points) Suppose that you know today that you will be purchasing a pen of segregate early weaned pigs a few months from now and that you will need 10,000 bushels of corn for feeding purposes. Additionally, you know that given the current corn cash price of $2.35/bu., you have the potential to feed-out these pigs for a profit. However, you are concerned that the corn price may move against you before you purchase the hogs. You purchase a $2.55/bu. call option for $0.30/bu. and expect the basis to be $0.05 under. When you are ready to purchase the hogs and corn to make feed, the cash and futures prices have increased to $3.00/bu. and $3.05/bu., respectively. Assuming zero time value and that the broker charges a commission of $50 per option traded, answer the questions below. h. Compute the target price. i. Compute the gain/loss per bu. you have earned on options in terms of the premium as a result of price change. The premium gain will be $0.30 per bushel Gain in money= $3.05-$2.55= $0.50 less premium paid =$0.30- ($2.55-$2.35)= $0.10 j. Compute the effective buying price (EBP), and by comparing it to your target price comment on whether it was a good deal. Effective Selling Price= Current cash price per bushel + Gain from options per bushel $2 k. Compute the overall gain/loss as a result of dealing with the options. Are you better/worse off as a result of dealing with options as opposed to not dealing with options at all, and why? Better off m. Give an example of a futures price that would render your call option out-of-the- money.