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3. A farmer is growing a crop that will be harvested six months from now. He is uncertain about the spot price at harvest time

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3. A farmer is growing a crop that will be harvested six months from now. He is uncertain about the spot price at harvest time and about the eventual size of his crop. Which of the following, if any, is good advice for a risk-averse farmer? Provide your reasoning. I. Always sell forward the average total crop yield. Il. Never sell forward any more than the minimum possible total harvest. III. Never sell forward more than the maximum or less than the minimum total harvest. A farmer is growing a crop which, due to vagaries of weather, disease and so on, will produce 10,000, 50,000, or 20,000 bushels with equal likelihood. The cash price at harvest time could be $3, $5, or $10 per bushel with equal probability. We could sell all or part of his crop forward now at $6 making up any shortfall in the spot market. Assume he can make transactions only now or at harvest time. By looking at the risk exposures, use your best judgment to decide how much he should sell forward if the risk in the price and yield are independent of each other. 4

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