Question
Six months from now, Farmer Sam will harvest 20,000 bushels of corn. In doing so, he incurs costs of $93,000. The current spot price of
Six months from now, Farmer Sam will harvest 20,000 bushels of corn. In doing so, he incurs costs of $93,000. The current spot price of corn is $4.90 per bushel, and the effective six-month interest rate is 6 percent. Sam has decided to hedge with a collar by purchasing $4.70-strike puts and selling $5.10-strike calls on 20,000 bushels of corn. The puts have a premium of $0.36 per bushel, while the calls have a premium of $0.63 per bushel. What total profit would Sam earn if the market price of corn at harvest time is $4.30, $4.70, $5.10, and $5.50, respectively?
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