Short hedgers (e.g. grain producers or ranchers) can use futures contracts or options contracts when they are marketing their commodities.

A) Discuss all the differences between marketing with futures contracts and marketing with options contracts when you are selling commodities.

The manager of a feedlot just bought a call on the corn futures contract for March 2024 delivery because he wants to hedge the grain he is going to buy next year to feed his cattle. The call he bought has a strike price of $5.00/bu and he paid $0.25/bu for this call. Assume no trading fees here.

[a] Assuming the historical basis in his cash market is around -$0.30/bu in March, what is the maximum buying price he established with this call? Make sure to show all calculations clearly.

[b] Now we move forward and it's March 2024. The manager of the feedlot is buying corn and lifting his hedge. Assume that, on the day he is buying the grain and lifting the hedge, the spot price in his local cash market is $4.55/bu and the futures price is $4.80/bu. What is the realized price of this hedge? Make sure to show all calculations clearly.

[c] In this example, would the feedlot manager be better off with or without the hedge? Why?