Suppose that you know today that you will be selling $15,000$ bushels of corn a few months from now. Additionally, you know that given the current cash price of $$2\mathrm{.}35/$bu$.,$ you have the potential to profit. However, you are concerned that the price may move against you. You purchase a $$2\mathrm{.}50/$bu$.$ put option for $$0\mathrm{.}20/$bu$.$ and expect the basis to be $$0\mathrm{.}05$ under. When you are ready to sell the corn, the cash and futures prices have decreased to $$2\mathrm{.}15/$bu$.$ and $$2\mathrm{.}20/$bu$.,$ respectively. Assuming zero time value and that the broker charges a commission of $$50$ per option traded, answer the questions from $5$ through $10.$

What is the number of option contracts needed to fully protect your $15,000$ bushels?

Question $5$ options:

$3$

$4$

$5$

$6$

Question $6(10$ points$)$

Saved

What is the the target price?

Question $6$ options:

$$2\mathrm{.}20/$bu$.$

$$2\mathrm{.}25/$bu$.$

$$2\mathrm{.}30/$bu$.$

$$2\mathrm{.}50/$bu$.$

Question $7(10$ points$)$

Compute the gain$/$loss per bu$.$ you have earned on options in terms of the premium as a result of price change.

Question $7$ options:

$$0\mathrm{.}10/$bu$.$

$$0\mathrm{.}20/$bu$.$

$$0\mathrm{.}30/$bu$.$

$$2\mathrm{.}30/$bu$.$

Question $8(10$ points$)$

Compute the effective selling price $($ESP$).$

Question $8$ options:

$$2\mathrm{.}15/$bu$.$

$$2\mathrm{.}25/$bu$.$

$$2\mathrm{.}35/$bu$.$

$$2\mathrm{.}45/$bu$.$

Question $9(10$ points$)$

Compute the overall gain$/$loss as a result of dealing with the options accounting for a commission of $$50$ per option traded.

Question $9$ options:

$$1,350$

$$1,400$

$$1,450$

$$1,500$

Question $10(10$ points$)$

Overall, in this case, you are better$-$off dealing with options.

Question $10$ options:

True

False