Derivatives Markets:
To plant and harvest 20,000 bushels of corn, Farmer incurs fixed and variable costs totaling $33,000 at the time of the harvest. The current spot price of corn is $1.80 per bushel and the six-month interest rate is 4.0%. Farmer will harvest and sell her corn in 6 months. Farmer has the opportunity to hedge all 20,000 bushels using put options with strike price $1.80 for a total cost of $2,400
a) If Farmer decides to hedge, what will her marginal change in profits be if the spot price of corn drops from $1.80 to $1.75 by the time she sells her crop in 6 months?
b) Corn call options with a $1.75 strike price are trading for a $0.14 premium. Farmer decides to hedge her 20,000 bushels of corn by selling short call options. What is the total premium she will earn on her short posiition and what will her exposure look like in 6 months?
c) Corn call options with a $1.70 strike price are trading for a $0.15 premium. Farmer decides to hedge her 20,000 bushels of corn by selling short call options. What will her profit or loss be if the spot price in 6 months is $1.60 per bushel?