1 Considering a grain producer who uses futures contracts to sell his grain, (i) discuss why this producer would roll his hedge backward and (ii) create and explain two numerical examples to illustrate how a backward rolling hedge works One example should address a case when futures prices are going up and the other example should address a case when futures prices are going down I suggest that you go back to the slides and handout on rolling hedges and follow the same structure to create your numerical examples 2 You want to price 100,000 bu of your soybeans for delivery in March Historically, your local basis is around $0 55 bu in March You check the futures market and saw that the futures price for March delivery is trading at $13 40 bu Then you call your local grain elevator and the manager offers two contracts with the following specifications (1) Hedge to arrive contract 5 advance payment, $0 03 bu service fee (2) Basis contract basis set at $0 50 bu, 35 advance payment, no service fee You know that you will need some cash during the winter, so you need to raise some funds within the next couple of months Further, you believe that the futures price will start decreasing during the winter, but your local basis will narrow compared to its historical level Based on all the information above, discuss in detail which of these two contracts you would choose to price your grain today 3 Think about options on futures contracts and their premiums, and specifically about intrinsic value and time value How does the intrinsic value for puts and calls change as the underlying futures price changes How does the intrinsic value for puts and calls change as the option contract approaches its expiration day How does the time value for puts and calls change as the underlying futures price changes How does the time value for puts and calls change as the option contract approaches its expiration day Today a put on the soybean futures contract for January delivery with strike $10 90 bu is trading at $0 37 bu (premium) Knowing that the futures price for January delivery is now $10 59 bu, what should happen with the premium of this put if the underlying futures contract keeps going up until its expiration Make sure to explain what should happen to both intrinsic and time value Today a put on the corn futures contract for March delivery with strike $4 60 bu is trading at $0 11 bu (premium) Knowing that the futures price for March delivery is now $4 66 bu, what should happen with the premium of this put if the underlying futures contract starts going down until its expiration Make sure to explain what should happen to both intrinsic and time value 4 It is early July in 2029, and a grain producer has some corn in storage and is planning to sell it before the next harvest He was planning to sell now, but he is wondering if the price could still increase between July and September Basically, he is trying to decide whether to sell now, or keep the grain in storage and wait a while longer to possibly sell at a higher price later If he sells now, he will receive the current spot price of $3 70 bu in his local cash market If he keeps the grain in storage, storage costs are $0 04 bu month and he will be looking for higher prices between June and September to sell the grain A friend of this producer tells him that he could sell the grain now and buy a call on the futures contract for September delivery Then, he can get paid right away and doesn't have to worry about storage anymore And if the corn price increases within the next few months, he can exercise his call and profit from the higher corn price His friend suggests to buy the call on the futures contract for September delivery with strike of $4 30 bu, which is now trading at $0 14 bu (premium) As a reference, corn futures prices are currently trading at $4 17 bu for July delivery and $4 25 bu for September delivery The brokerage fee to trade options is $0 01 bu How would you advice this producer Should he sell the grain now and buy a call, or should he just keep the grain in storage and sell later (without buying a call) Explain your answer in detail

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1. Considering a grain producer who uses futures contracts to sell his grain, (i) discuss why this producer would roll his hedge backward and (ii)

1. Considering a grain producer who uses futures contracts to sell his grain, (i) discuss why this producer would roll his hedge backward and (ii) create and explain two numerical examples to illustrate how a "backward-rolling hedge" works. One example should address a case when futures prices are going up and the other example should address a case when futures prices are going down. I suggest that you go back to the slides and handout on rolling hedges and follow the same structure to create your numerical examples.

You want to price 100,000 bu of your soybeans for delivery in March. Historically, your local basis is around -$0.55/bu in March. You check the futures market and saw that the futures price for March delivery is trading at $13.40/bu. Then you call your local grain elevator and the manager offers two contracts with the following specifications:

(1) Hedge-to-arrive contract: 5% advance payment, $0.03/bu service fee.

(2) Basis contract: basis set at -$0.50/bu, 35% advance payment, no service fee.

You know that you will need some cash during the winter, so you need to raise some funds within the next couple of months. Further, you believe that the futures price will start decreasing during the winter, but your local basis will narrow compared to its historical level.

Based on all the information above, discuss in detail which of these two contracts you would choose to price your grain today.

Think about options on futures contracts and their premiums, and specifically about intrinsic value and time value.

How does the intrinsic value for puts and calls change as the underlying futures price changes?
How does the intrinsic value for puts and calls change as the option contract approaches its expiration day?
How does the time value for puts and calls change as the underlying futures price changes?
How does the time value for puts and calls change as the option contract approaches its expiration day?
Today a put on the soybean futures contract for January delivery with strike $10.90/bu is trading at $0.37/bu (premium). Knowing that the futures price for January delivery is now $10.59/bu, what should happen with the premium of this put if the underlying futures contract keeps going up until its expiration? Make sure to explain what should happen to both intrinsic and time value.
Today a put on the corn futures contract for March delivery with strike $4.60/bu is trading at $0.11/bu (premium). Knowing that the futures price for March delivery is now $4.66/bu, what should happen with the premium of this put if the underlying futures contract starts going down until its expiration? Make sure to explain what should happen to both intrinsic and time value.

4. It is early July in 2029, and a grain producer has some corn in storage and is planning to sell it before the next harvest. He was planning to sell now, but he is wondering if the price could still increase between July and September. Basically, he is trying to decide whether to sell now, or keep the grain in storage and wait a while longer to possibly sell at a higher price later.

If he sells now, he will receive the current spot price of $3.70/bu in his local cash market.

If he keeps the grain in storage, storage costs are $0.04/bu/month and he will be looking for higher prices between June and September to sell the grain.

A friend of this producer tells him that he could sell the grain now and buy a call on the futures contract for September delivery. Then, he can get paid right away and doesn't have to worry about storage anymore. And if the corn price increases within the next few months, he can exercise his call and profit from the higher corn price.

His friend suggests to buy the call on the futures contract for September delivery with strike of $4.30/bu, which is now trading at $0.14/bu (premium). As a reference, corn futures prices are currently trading at $4.17/bu for July delivery and $4.25/bu for September delivery. The brokerage fee to trade options is $0.01/bu.

How would you advice this producer? Should he sell the grain now and buy a call, or should he just keep the grain in storage and sell later (without buying a call)? Explain your answer in detail.