Question
Six months from now, Farmer Dean will harvest 5,000 bushels of wheat. In doing so, he incurs costs of $43,000. The current spot price of
Six months from now, Farmer Dean will harvest 5,000 bushels of wheat. In doing so, he incurs costs of $43,000. The current spot price of wheat is $9.10 per bushel, and the effective six-month interest rate is 4 percent. Dean has decided to hedge by purchasing put options on 5,000 bushels of wheat with a strike price of $9.10 per bushel. The puts have a premium of $0.49 per bushel. What total profit would he earn if the market price of wheat at harvest time is $8.50, $8.90, $9.30, and $9.70, respectively?
Answers: a. $3,216; $3,216; $5,216; $5,216
b. $2,048; $4,048; $5,048; $5,048
c. $4,300; $4,300; $4,300; $4,300
d. $500; $1,500; $3,500; $5,500
e. $48; $48; $952; $2,952
Please explain with formulas. Thank you.
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