On July 1, Farmer McDonald purchased a European put option on 100 tons of wheat from Great Northern Wheat Trading Company The strike price for this contract is $55 per ton and the expiration date is September 1 If the 1 September the spot price of wheat is 60 Farmer McDonald does not exercise the option and sells his wheat on the spot market On the other hand, if the spot price is $50 per ton, the option has a value of 100 ( 55 -50)= $500 and obviously exercised

Therefore, buying an option contract can be seen as a way for the contract holder to hedge against the risk of having to trade the commodity at a price less favorable than the spot price.

Perform the exercise, analysis, graphs in excel, etc.