Question

Look at the Feb Lean Hog chart below. Then consider the current market data. Evaluate your expected net price from a short hedge, a put, a fence, and a synthetic put. Tell me the advantages and disadvantages of a fence and of a synthetic put. Relative to the current market information, which would you choose and why?

70 69 WA NU ST 68 HAN Expected Basis = -$2.00 67 66 65 64 63 62 61 60 59 Feb Lean Hogs 10/8/09 $60.00 58 57 Call Prem thuthun 56 55 54 Strike Put prem 56 2.75 58 3.50 60 4.40 62 64 53 4.35 3.40 2.65 52 51 50 49 Apr-14 May-05 May-26 Jun-16 Jul-07 Jul-28 Aug-18 Sep-08 Sep-29

Answer 1

Hi

The answer of the following question is given below as follows:

First of all let'sEvaluate the expected net price:

Short Hedge Sold for $ 60 and repurchased for $ 56.

The Short sale: the exercise price must be $ 60. If the exercise price falls above $ 60, the premium to be paid must be $ 240. If it falls below the exercise price, it is advisable to buy 100 shares at $ 2.40.

Hence - It is advisable to sell at $ 62 and buy back the shares at $ 60.

So the Synthetic Put - Sell for $ 60

Some of PROS and CONS of a fence and a synthetic fence is discussed below as follows :

A synthetic put option refers to a trading strategy in which a fixed price is changed to a floor price while a call option is purchased alongside another stock. The fixed price is converted to the minimum price but by selling the basic product or by having a forward contract. Also, when selling the futures, there will be a fixed price.

The fence is advantageous in that it is sold at a higher price and bought at a lower price. However, there are controversies. The share rate can be high when trying to buy back. Also, by selling the stock, the seller takes a loss as the price increases.

Choose in relation to current market information:

I would choose to buy the fence option because selling the shares at a higher price and buying them when their prices fall is very advantageous. However, the risk factor is high.