Question 6e (Bonus 15 points). Assume you are in November, and the spot wheat price is $6.9/bushel which is a breakeven price for you. If you don't buy today, you may gain by buying in December conditional on possible price falls. You are comparing possible outcomes of hedging by purchasing a December wheat futures contract at $6.50/bushel and hedging with buying a $6.50 wheat call option for 15 cents. (For full credit show your work) December wheat Basis Call option Total return of Total return of futures premium (S) hedging with long hedging with the futures (S) long call(s) $6.00 -$0.15 $0.02 $6.30 -$0.15 $0.03 $6.60 +$0.05 $0.35 $6.70 +0.15 $0.50 $7.00 +0.15 $0.55 Question of (Bonus 15 points). An expert trader informs you that wheat futures will not pass $7.00 during the next 12 months, and she suggests you buy a $6.40 wheat call option for 10 cents and sell a $6.60 put for 4 cents to compensate the premium you paid buying a call option partly. Calculate the net buying price and total return from hedging with long call and short put under the following scenarios: (For full credit show your work) December wheat Basis Call option Net purchasing Total return of hedging futures ($) premium ($) price ($) with the long call and short put(s) $6.00 -$0.15 $0.02 $6.45 -$0.15 $0.03 $6.50 +$0.05 $0.35 $6.70 +0.15 $0.50 $7.00 +0.15 $0.55