Suppose you own a grove of orange trees. The harvest is still two months away but

you are concerned about price risk. You want to guarantee that you will receive

$$1\mathrm{.}00$ per pound in two months regardless of what the spot price is at that time. You

are selling $250,000$ pounds.

a$.$ Show the economics of a short transaction in the forward market if the spot price

on delivery date is $$0\mathrm{.}75$ per pound, $$1\mathrm{.}00$ per pound, or $$1\mathrm{.}25$ per pound.

b$.$ What would have happened to you if you had not entered the hedge and each

scenario is equally likely?

c$.$ What is the variability of your receipts after the hedge is in place?