Suppose you are the buying agent for a soybean crushing business that produces biodiesel for the alternative fuel industry. Part of your job responsibilities are to ensure the company has an adequate supply of soybeans so that the supply stream is not interrupted and of course you want to minimize the cost of the soybeans and manage future price risk. Management has asked you to evaluate long hedges for the purchase of soybeans 6 months in the future. To keep this simple, you are asked to limit your evaluation to only 5,000 bushels of soybeans (1 contract). In this evaluation, you will set up a hedge using only futures contracts then compare this to a hedge using soybean call options. Below are the details required for this analysis:

Beginning of Hedge (Current Time Period)

Cash price of soybeans available for immediate delivery: $8.50/bushel

Futures Price of Soybeans on a contract six months in the future: $8.80/bushel

Call Option Premium on the above soybean contract with the $8.80/bushel strike price: $0.10/bushel

End of Hedge 6 months later

Cash price of soybeans available for immediate delivery: $9.70/bushel

Futures Price of Soybeans on the original contract: $9.91/bushel

Call Option Premium on the above soybean contract with the $8.80/bushel strike price: $1.23 /bushel

Assume no transaction fees with the brokers.

1. At the end of the hedge and assuming the futures positions were offset, what would have been the companys final estimated cost per bushel using futures contracts only? (10 Points)
2. At the end of the hedge, what would have been the companys final estimated cost per bushel using the soybean call options? Assume you offset your original call position and kept any gains or losses from the option transaction. (10 Points)
3. At the end of the hedge, what would have been the companys final estimated cost per bushel assuming the option was used to create a position in the futures market and then this position was immediately offset using the end of hedge futures price? (10 Points)
4. As you present the outcomes to management, one manager asks what hedging approach should be taken in the future if some major trade deals in the works with China and other nations collapse causing the price of soybeans to dramatically fall even lower than the beginning of the hedge futures price? (5 Points)