Exercise 17 At harvest, you decide to sell your newly harvested soybeans and buy 6 call option contracts on May soybeans to lock in a minimum price on 30,000 bushels of soybeans, while retaining the possibility of a higher price, should prices trend higher in the months ahead I want you to complete the transaction next spring, under three different scenarios Fill in the blanks in the Tdiagram, showing the price you received in $ bushel or in gross sales revenues (price quantity) Ignore ownership (storage) costs Scenario 1 Futures prices change little from harvest to spring Date Cash Options Basis October Harvest 30,000 bushels of soybeans Your local elevator is bidding $12 35 bu Make the sale and reown soybeans with the purchase of call options on May futures With May futures trading at $13 00 bu , the producer buys 6 contracts of 1300 May call options, at a premium of $1 01 bu Minimum price established (aka worst case scenario) is $12 35 $1 01 $ 01 $11 33 bu midApril (just before expiration of May options) NA With May soybean futures at $12 70 bu , the 1300 calls are worth less than 1 cent bu Let them expire NA Results What did you receive in the cash market $ bu $total What was your gain or loss on the put options $ bu $total What final price did you receive for your corn $ bu $total Scenario 2 Futures prices rise $1 bu from harvest to spring Date Cash Futures Basis October Harvest 30,000 bushels of soybeans and sell to your local elevator for $12 35 bu May futures trading at $13 00 bu , buys 6 contracts of 1300 May call options, at a premium of $1 01 bu Minimum price established (aka worst case scenario) is $12 35 $1 01 $ 01 $11 33 bu midApril (just before expiration of May options) NA With May soybean futures at $14 00 bu , the 1300 calls are worth $1 bu sell options for a $1 bu gain NA Results What did you receive in the cash market $ bu $total What was your gain or loss on the put options $ bu $total What final price did you receive for your corn $ bu $total Scenario 3 Futures prices fall $1 bu from harvest to spring Date Cash Futures Basis October Harvest 30,000 bushels of soybeans and sell to your local elevator for $12 35 bu May futures trading at $13 00 bu , buys 6 contracts of 1300 May call options, at a premium of $1 01 bu Minimum price established (aka worst case scenario) is $12 35 $1 01 $ 01 $11 33 bu midApril (just before expiration of May options) NA With May soybean futures at $12 00 bu , the 1300 calls have lost all value let them expire worthless NA Results What did you receive in the cash market $ bu $total What was your gain or loss on the put options $ bu $total What final price did you receive for your corn $ bu $total

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jul 20, 2024

Exercise #17 At harvest, you decide to sell your newly harvested soybeans and buy 6 call option contracts on May soybeans to lock in a

Exercise #17

At harvest, you decide to sell your newly harvested soybeans and buy 6 call option contracts on May soybeans to lock in a minimum price on 30,000 bushels of soybeans, while retaining the possibility of a higher price, should prices trend higher in the months ahead.

I want you to complete the transaction next spring, under three different scenarios. Fill in the blanks in the Tdiagram, showing the price you received in $/bushel or in gross sales revenues (price * quantity). Ignore ownership (storage) costs.

Scenario #1: Futures prices change little from harvest to spring

Date	Cash	Options	Basis
October	Harvest 30,000 bushels of soybeans. Your local elevator is bidding $12.35/ bu. Make the sale and reown soybeans with the purchase of call options on May futures.	With May futures trading at $13.00/bu., the producer buys 6 contracts of 1300 May call options, at a premium of $1.01/bu.	Minimum price established (aka worst case scenario) is $12.35 $1.01 $.01 = $11.33/bu.
midApril (just before expiration of May options)	NA	With May soybean futures at $12.70/bu., the 1300 calls are worth less than 1 cent/bu. Let them expire.	NA
Results	What did you receive in the cash market? $/bu. _____________ $total _____________	What was your gain or loss on the put options? $/bu. _____________ $total _____________	What final price did you receive for your corn? $/bu. _____________ $total _____________

Scenario #2: Futures prices rise $1/bu. from harvest to spring

Date	Cash	Futures	Basis
October	Harvest 30,000 bushels of soybeans and sell to your local elevator for $12.35/ bu.	May futures trading at $13.00/bu., buys 6 contracts of 1300 May call options, at a premium of $1.01/bu.	Minimum price established (aka worst case scenario) is $12.35 $1.01 $.01 = $11.33/bu.
midApril (just before expiration of May options)	NA	With May soybean futures at $14.00/bu., the 1300 calls are worth $1/bu. sell options for a $1/bu. gain.	NA
Results	What did you receive in the cash market? $/bu. _____________ $total _____________	What was your gain or loss on the put options? $/bu. _____________ $total _____________	What final price did you receive for your corn? $/bu. _____________ $total _____________

Scenario #3: Futures prices fall $1/bu. from harvest to spring

Date	Cash	Futures	Basis
October	Harvest 30,000 bushels of soybeans and sell to your local elevator for $12.35/ bu.	May futures trading at $13.00/bu., buys 6 contracts of 1300 May call options, at a premium of $1.01/bu.	Minimum price established (aka worst case scenario) is $12.35 $1.01 $.01 = $11.33/bu.
midApril (just before expiration of May options)	NA	With May soybean futures at $12.00/bu., the 1300 calls have lost all value let them expire worthless.	NA
Results	What did you receive in the cash market? $/bu. _____________ $total _____________	What was your gain or loss on the put options? $/bu. _____________ $total _____________	What final price did you receive for your corn? $/bu. _____________ $total _____________