It is now March 3 and you are considering the purchase of puts to set a floor on the price you will receive for your May milk production. The strike prices (reported in $0.01/cwt) and premiums (reported in $/cwt) for May milk puts are shown below. The milk futures contract is currently trading for $14.34/cwt, and local buyers are paying $14.85. Assume an expected basis in May of $0.60/cwt, and that May puts will trade for their intrinsic value in May. 1. If you wanted to purchase the least expensive put that guarantees you an effective price of $13.25/cwt or better, which strike price would you choose? 2. What would your minimum effective price be if you hedge with this option? Premium .02 .03 Strike 1225 1250 1275 1300 1325 1350 1375 1400 1425 1450 1475 1500 1525 1550 1575 It is now March 3 and you are considering the purchase of puts to set a floor on the price you will receive for your May milk production. The strike prices (reported in $0.01/cwt) and premiums (reported in $/cwt) for May milk puts are shown below. The milk futures contract is currently trading for $14.34/cwt, and local buyers are paying $14.85. Assume an expected basis in May of $0.60/cwt, and that May puts will trade for their intrinsic value in May. 1. If you wanted to purchase the least expensive put that guarantees you an effective price of $13.25/cwt or better, which strike price would you choose? 2. What would your minimum effective price be if you hedge with this option? Premium .02 .03 Strike 1225 1250 1275 1300 1325 1350 1375 1400 1425 1450 1475 1500 1525 1550 1575