Question
Six months from now, Farmer Don will harvest 10,000 bushels of corn. In doing so, he incurs costs of $32,000. The current spot price of
Six months from now, Farmer Don will harvest 10,000 bushels of corn. In doing so, he incurs costs of $32,000. The current spot price of corn is $3.50 per bushel, and the effective six-month interest rate is 5 percent. Don has decided to hedge with a collar by purchasing $3.30-strike puts and selling $3.70-strike calls on 10,000 bushels of corn. The puts have a premium of $0.16 per bushel, while the calls have a premium of $0.31 per bushel. What total profit would Don earn if the market price of corn at harvest time is $2.90, $3.30, $3.70, and $4.10, respectively?
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