Mr. Harvey Feeder has a feedlot near Hometown, Wyoming. In March Mr. Feeder is concerned that the drought situation across the Midwest will strengthen cash prices for corn above the level seen the last several years, which could be costly. On March 15, he places an option order to cover his purchase for 30,000 bushels of corn in September. He would like to set a maximum purchase price near $3.30/bu, and he expects the basis to be $0.30/bu under in the delivery month. He considers purchasing the appropriate options (calls or puts, you decide) at strike prices of $3.10 (premium $0.33/bu), $3.30 (premium = $0.195/bu) and $3.50 (premium = $0.12/bu). In late August, Mr. Feeder buys the corn from the local elevator for $3.40/bu, and the underlying futures is $3.60/bu.

a) Which option comes closest to his target price for the least cost? b) What is the expected target price of the option you chose in part a? c) Show the transactions in the cash and options market (use same format as presented in class).

Date	Cash Market	Options Market

d) What is the realized price after the hedge is lifted (not including additional marketing costs)? e) Did basis narrow (strengthen) or widen (weaken) compared to expectations?