Suppose you own a coffee plantation and are very concerned about price risk associated with this commodity. You want to guarantee that you will receive $2.25 per pound in a month regardless of what the spot price is at the time. You are selling five hundred thousand pounds. Suppose you purchase insurance in the form of a put option with an exercise price of $2.35 per pound on five hundred thousand pounds. Suppose the option costs you $50,000. This guarantees you a minimum of $2.25 per pound net of the cost of the option.

Show the economics of such a transaction for alternative spot prices on delivery date of $2.15 per pound, $2.25 per pound, $2.35 per pound, or $2.45 per pound. Under what circumstances would you exercise your option?