Suppose that you know today that you will be purchasing a pen of segregate early weaned pigs a few months from now and that you will need 10,000 bushels of corn for feeding purposes. Additionally, you know that given the current corn cash price of $2.35/bu., you have the potential to feed-out these pigs for a profit. However, you are concerned that the corn price may move against you before you purchase the hogs. You purchase a $2.55/bu. call option for $0.30/bu. and expect the basis to be $0.05 under. When you are ready to purchase the hogs and corn to make feed, the cash and futures prices have increased to $3.00/bu. and $3.05/bu., respectively. Assuming zero time value and that the broker charges a commission of $50 per option traded, answer the questions below.

1. Compute the effective buying price (EBP), and by comparing it to your target price comment on whether it was a good deal.

2. Compute the overall gain/loss as a result of dealing with the options.

3. Are you better/worse off as a result of dealing with options as opposed to not dealing with options at all, and why?

4. Give an example of a futures price that would render your call option out-of-the-money.