Question
After collecting basis data, a canola grower feels that 775 dollars per tonne is a realistic forward cash price for the falls crop since November
After collecting basis data, a canola grower feels that 775 dollars per tonne is a realistic forward cash price for the falls crop since November canola futures are trading at 800 dollars per tonne. To hedge, the producer purchases an at-the-money PUT for 20 dollars tonne on May 19th. While the hedge was in place, canola producers in Europe experienced crop failures and consumers in China began to import large quantities of canola produced in Canada. By October 15th, November canola futures had risen to 825 dollars per tonne. However, because of increased local production, the basis in the growers region weakened by 5 dollars tonne. On October 15th the grower sold his canola in the cash market.
Use T-accounts to answer the following:
a. What is the net selling price from hedging using the PUT?
b. What price would the producer have received if he had hedged using futures?
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