Bob Smith is a wheat farmer in northern Missouri. On his farm he grows 10,000 acres of soft red winter SRW) wheat. He expects to grow 52 bushels of wheat an acre this year (this the average production per acre in the US in 2019). Mr. Smith will harvest his crop in July. Mr. Smith would like your advice to hedge his risks associated with the price of wheat. For this section, unless otherwise noted, please use the following information: Between planting, harvesting, and delivery the wheat in July, he will spend $1.50 a bushel to grow his wheat. The continuously compounded risk-free rate through the harvest date in July (exactly 3 months from now) is 2% per year. The spot price of SRW wheat is $5.27 a bushel. Assume that Smith will physically deliver his wheat to St. Louis, MO to settle any derivatives and that he faces no additional costs for doing this relative to selling his wheat without using derivatives. Unless otherwise stated, assume that Smith pays no brokerage or margin costs and Mr. Smith knows exactly how much wheat he will produce. If you need to know the price of SRW at settlement in July, assume will sell for $6 per bushel, but that this is unknown at the time Smith enters into the contract in April. Question 1.1 He is interested in eliminating his price risk with Chicago Board of Trade (CBOT) SRW futures. SRW futures are the world's most liquid wheat derivative contract. The July 2020 SRE future is trading at 530'4, which means that the price per bushel at settlement is $5.3025. One SRW contract covers 5,000 bushels.? A) To eliminate his price risk, should he go long or go short SRE futures and why? B) How many futures contracts does he need? C) How much money should he get at the maturity of the contract? Show your work. D) What is his profit on the whcat? Show your work and explain. Bob Smith is a wheat farmer in northern Missouri. On his farm he grows 10,000 acres of soft red winter SRW) wheat. He expects to grow 52 bushels of wheat an acre this year (this the average production per acre in the US in 2019). Mr. Smith will harvest his crop in July. Mr. Smith would like your advice to hedge his risks associated with the price of wheat. For this section, unless otherwise noted, please use the following information: Between planting, harvesting, and delivery the wheat in July, he will spend $1.50 a bushel to grow his wheat. The continuously compounded risk-free rate through the harvest date in July (exactly 3 months from now) is 2% per year. The spot price of SRW wheat is $5.27 a bushel. Assume that Smith will physically deliver his wheat to St. Louis, MO to settle any derivatives and that he faces no additional costs for doing this relative to selling his wheat without using derivatives. Unless otherwise stated, assume that Smith pays no brokerage or margin costs and Mr. Smith knows exactly how much wheat he will produce. If you need to know the price of SRW at settlement in July, assume will sell for $6 per bushel, but that this is unknown at the time Smith enters into the contract in April. Question 1.1 He is interested in eliminating his price risk with Chicago Board of Trade (CBOT) SRW futures. SRW futures are the world's most liquid wheat derivative contract. The July 2020 SRE future is trading at 530'4, which means that the price per bushel at settlement is $5.3025. One SRW contract covers 5,000 bushels.? A) To eliminate his price risk, should he go long or go short SRE futures and why? B) How many futures contracts does he need? C) How much money should he get at the maturity of the contract? Show your work. D) What is his profit on the whcat? Show your work and explain
