1. [15 points] It is March 12. Novel Oil Inc. is a palm oil distributor in Canada. Imagine Novel Oil Inc. has just entered into a contract with a group of dairy producers in Ontario to sell 2,000 tons of crude palm oil, to be delivered on July 12, 202 The sale price is agreed by both parties to be based on the market price of crude palm oil on the day of delivery. The July crude palm oil futures is trading at US$ 1,085 per ton with the expected adjusted basis of CND$50 per ton under, the Canadian dollar is trading at US$0.80 per $CND. If Novel Oil Inc. is forward contracting, it signs a contract with the farmers at CND$1,350 per ton. Another alternative is to buy the July crude palm oil futures PUT options with a US$1,500 per ton strike price for a premium of US$500 per ton. Market conditions when crude palm oil is bought on July 12, 2021, are: July futures is trading at US$1,150 per ton, July Canadian dollar is trading at US$0.75 per $CND. Assuming the adjusted basis is CND$50 per ton under as expected. The contract size is 10 tons.

1. Calculate the intrinsic and time values of the PUT option on March 12 (in CND$ per ton). Calculate the intrinsic of the PUT option on July 12 (in CND$ per ton).
2. On separate diagrams, draw the profit or loss (in Canadian dollar) graph for the futures contract and the long PUT options contract at expiration. Label your diagram appropriately.
3. Calculate the net cash price for each marketing strategy on July 12, 2021: (i) hedge with a forward contract, (ii) hedge with futures or (iii) hedge with PUT options. Calculate the net gain or loss for each strategy.
4. If Novel Oil Inc. knew with perfect foresight what would happen to prices in July, which contract would you recommend: (i) hedge with a forward contract, (ii) hedge with futures or (iii) hedge with PUT options? Why?