Pre$-$harvest hedge $-$ Forward contract and buy call option

It is April. You are grain producer who grows and sells corn and soybeans. You are planning a corn delivery date in October. In April, the December corn futures contract was trading for $$\frac{3\mathrm{.}84}{?}$ bushel. You are offered an October forward contract price of $$3\mathrm{.}90.bu.$ The December Call option out$-$of$-$money strike price of $$\frac{4\mathrm{.}00}{?}$ bu$.$ has a premium of $$\frac{0\mathrm{.}17}{b}u.$ Set a price floor with the forward contract price minus the Call option premium. In October, the December corn futures contract is trading for $$\frac{3\mathrm{.}50}{b}u.$

Pre$-$Harvest hedge: Forward contract and buy Call options

Crop:

$\backslash$table$[[$Corn$],[\backslash$table$[[$Date$]],$Cash Market,Futures$/$Option Market$],[$April$,\backslash$table$[[$Action:$],[$Price Floor:$]],\backslash$table$[[$Futures Price:$],[$Action:$],[$Strike Price:$],[$Premium:$]]],[$Oct$,$Actual:,$\backslash$table$[[$Option Action:$],[$Futures Action:$]]]]$

Cash price when grain is sold:

Call option premium:

Futures gain:

Effective selling price:

$2.$ Same as the above scenario but in October, the December corn futures contract has increase to $$\frac{4\mathrm{.}50}{b}u.$

Pre$-$Harvest hedge: Forward contract and buy Call options

Crop:

$\backslash$table$[[$Corn$],[$Date$,$Cash Market,Futures$/$Option Market$],[$May$,\backslash$table$[[$Action:$],[$Price Floor:$]],\backslash$table$[[$Futures Price:$],[$Action:$],[$Strike Price:$],[$Premium:$]]],[$Oct$,$Actual:,$\backslash$table$[[$Option action:$],[$Futures Action:$]]],[,,]]$

Cash price when grain is sold:

Call option premium:

Futures gain:

Effective selling price:

Compare above two scenarios with a Put option hedge to establish a price floor with an out$-$of$-$money strike price of $$3\mathrm{.}70$ and premium of $$\frac{0\mathrm{.}15}{b}u.$ In October, the December corn futures price is $$3\mathrm{.}50$

Pre$-$Harvest hedge: Buy Put

$\backslash$table$[[$Date$,$Cash Market,Futures$/$Option Market,Basis$],[$April$,$Action:,$\backslash$table$[[$Futures Price:$],[$Action:$],[$Strike Price:$],[$Premium:$]],+0\mathrm{.}10],[$Oct$,$Actual:,Option action:,$],[$Price Floon,,,$]]$

Crop: Corn

Cash price when grain is sold:

Put option premium:

Futures gain:

Effective selling price:

$4.$ In October, the December corn futures price is $$4\mathrm{.}50$

Pre$-$Harvest hedge: Buy Put

Crop: Corn

$\backslash$table$[[$Date$,$Cash Market,Futures$/$Option Market,Basis$],[$April$,$Action: one,$\backslash$table$[[$Futures Price:$],[$Action:$],[$Strike Price:$],[$Premium:$]],+0\mathrm{.}10],[$Oct$,$Actual:,Option action:,$+0\mathrm{.}10]]$

Cash price when grain is sold:

Put option premium:

Futures gain:

Effective selling price:

What effective selling prices would you have received if you had done no hedging?

What effective selling prices would you have received if you had just forward contracted?

Farmer's Marketing Alternatives $-$ A Graphical Perspective

exercise

expiration

Are all of the above strategies

represented by the graph below?