Question

You are a small dairy owner. You have 100 cows that you are milking that each produce 70 lbs. of milk per day. That means you produce about 210,000 lbs. of milk each month. A CME Class III Milk contract is for 200,000 lbs. You want to protect your January price for milk using an option. In a word document explain this transaction.

You are concerned that the price of corn may increase over the next few months and you want to be protected from higher prices but you still want to be able to take advantage of lower prices if they occur. Explain purchase the appropriate corn option in the same document. (Assume you need 5,000 bushel of corn, one contract and use the March contract.)

Answer 1

2 I am Answer: Summarized the information given in the questions You are à small daily owner Case-1: I am a owner of dairy form and producing milk, selling under a CME class III milk contract. → while selling milk my major problem is rate of milk. I am bothering about reduction in milk rate. So I have to pootect my selling price of milk. - So, in options market I will protect my selling poice by buying put option Holder of put option) ~ Holder of put option have a right to sell at specified strike price. Here holder have sight to sell, it is not an obligation case in future if the date of milk decreases from the present price I can exercise the put option, and I can set off the loss in cash market (selling milk at low price) with put option : In future, the rate of milk increases then I will lapse the put option and and sell milk at sevised potce. In strate gy.

a am bothring about right to obligation Case-2: I am owner of dairy from my major expeness are food for cows (reen) while buying coon my mgor problem is rate of coon I increase in coon rate. So I have to protect my buying price of con. » So, in options maoket I will protect my buying porce by buying call option (Holder of call option). - Holder of call option have buy at specied strike gate. Here holder have right to buy, it is not an In case in future if the rate of coon increases from the present prices I can exercise the call option and I can setore the loss in each market (purchasing the corn at high-prorce) with call option stooligy. > In futute the rate of corn decreases then I will lapse the call option and buy coon from market with revised prices Please please kindly Up-vote Thank : you *