Question 2 (10 points):

CME options on grain and oilseed futures work as follows: the buyer of a March corn call (say), by exercising the option, gets a long position in a March corn futures with a price equal to the strike price. The buyer of a March put, by exercising, gets a short position in a March futures.

_____ 1. In May 2017, suppose that December 2017 corn futures were trading at $4.50/bushel. Farmer Jones went long a Dec 2017 $4.00-strike corn futures put (paying 45 cents for this downside protection). He harvested his corn the same day that the December corn options expired. At that time, the Dec. 2017 corn futures price had fallen to $3.50/bushel and the basis was 20 under. What did he net for his corn? Ignore interest rates, if any (i.e., assume the risk-free rate was 0). Please explain briefly.

A. $4.00

B. $3.80

C. $3.35

D. $3.30

E. $2.85

F. None of the above

_____ 2. Go back to the previous question (Q2.1). What would Mr. Jones have netted for his corn, if futures prices had risen to $7.00/bushel and the basis had been 20 under? Please explain briefly.

A. The same price as in Q2.1

B. $6.35

C. $6.80

D. $6.35

E. None of the above _____

3. When a farmer uses a fence strategy at time t (comprising call and put options on futures that expire at time T), the floor price for her crop at time T will be

A. The strike price of the put minus the net premium paid

B. The strike price of the put minus the net premium paid minus the basis at time T

C. The strike price of the put minus the net premium paid minus the basis at time t

D. The strike price of the call plus the net premium paid minus the basis at time T

E. None of the above

Can you explain how to correctly solve the three parts to Question 2?