Question

If you want to sell about 100,000 bushels of Corn in the Autumn. Assume you think that prices are currently high, $2.40 per bushel, and you want to hedge yourself. Discuss two possible hedging strategies : (1) based on futures / forwards, and (2) based on options. Assume that the relevant positions have contract prices or exercise prices of $2.50 per bushel. The price of the option is $ 0.12 (12 cents) per bushel. Indicate how your “real position, derivative position, and overall outcome” depends on the final corn price and on the hedge strategy. In each case, you might indicate the outcomes if corn next Autumn turns out to be $2.00 or $2.50 or $3.00 per bushel.

Answer 1

The current price of corn is $2.40 per bushel , which is higher than the expected. If we want to take advantage of this high price , we either sell in future market or create short position.

The contract price for Autumn forward contract is $2.50, which is higher than the current market price . we can secured the selling price of corn by selling of forward contract.

Hedge through Option: we should create a long position in PUT option with exercise price of 2.50, and paying a premium of 0.12, which secure the selling price of the corn.

Price in Autumn	Selling price for forward	Net profit(per bushel)	price for Option	Net profit(per Bushel)
2	2.5	0.5	2.5	0.38
2.5	2.5	0	2.5	-0.12
3	2.5	-0.5	2.5	-0.12