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Six months from now, Farmer Julie will harvest 20,000 bushels of wheat. In doing so, she incurs costs of $144,000. The current spot price of
Six months from now, Farmer Julie will harvest 20,000 bushels of wheat. In doing so, she incurs costs of $144,000. The current spot price of wheat is $7.70 per bushel, and the effective six-month interest rate is 4 percent. Julie has decided to hedge by purchasing put options on 20,000 bushels of wheat with a strike price of $7.60 per bushel. The puts have a premium of $0.66 per bushel. What total profit would she earn if the market price of wheat at harvest time is $7.10, $7.50, $7.90, and $8.30, respectively?
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