It is$$ April, and Hans Anderson is planting his barley crop near$$ Plunkett, Saskatchewan. He is concerned about losing his farm if his operations result in a loss at the end of the season. He expects to harvest $3$ comma $000$ tonnes of barley and sell it in October. Futures contracts are available for October delivery with a futures price of $ $200$ per tonne. Options with strike price of $ $200$ per tonne are also$$ available; puts cost $ $16$ and calls cost $ $20.$

a$.$ Describe how Hans can fully hedge using futures contracts.

b$.$ Given the strategy in $($a$),$ what will be the total net amount received by Hans$($for all $3$ comma $000$tonnes$)$ if the price of barley in October is as$$ follows:

i $.$ $ $150$ per$$ tonne; ii$.$ $ $200$ per$$ tonne; iii. $ $250$ per tonne

c$.$ Describe how Hans can fully hedge using options.

d$.$ Given the strategy in $($c$),$ what will be the total net amount received by Hans$($for all$3,000$ tonnes$)$ if the price of barley in October is as$$ follows:

i$.$ $ $150$ per$$ tonne; ii$.$ $ $200$ per$$ tonne; iii. $ $250$ per tonne

e$.$ Hans has asked for your advice regarding hedging. Discuss how the each of the following individually will influence your advice.

i$.$ Hans does not expect to have much cash available between May and September.

ii$.$ Hans thinks there is a $25\%$ chance his crop will be destroyed by hail before he has a chance to harvest it$.$

iii.$$ Hans's farming business will go bankrupt if his net revenues in October do not cover his costs. He estimates his costs will be $ $570$ comma $000.$ If his business goes$$ bankrupt, Hans's bank will foreclose and take his house and farm.

iv$.$ Hans's farming business will go bankrupt if his net revenues in October do not cover his costs. He estimates his costs will be $ $800$ comma $000.$ If his business goes$$ bankrupt, Hans's bank will foreclose and take his house and farm.

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Part $1$

a$.$ Determine how Hans can fully hedge using futures contracts.

A$.$

Hans can take a long position in futures on $3$ comma $000$ tonnes of barley for delivery in October.

B$.$

Hans can take an intermediate position in futures on $3$ comma $000$ tonnes of barley for delivery in October.

C$.$

Hans can wait until prices rise in the future.

D$.$

Hans can take a short position in futures on $3$ comma $000$ tonnes of barley for delivery in October.