Farmer Jayne bought a $1.70 strike put option for $0.11 and sold a $1.75 strike call option for a premium of $0.14.Her total costs are $1.65 per bushel and interest rates are 4.0% over this period.What is the floor in her strategy assuming a 20,000-bushel crop?
A) $624
B) $1,624
C) $2,624
D) $3,624

Question

Quizplus · Accepted Answer

The cost of the put option is $0.11 per bushel, and the cost of the call option is a premium of $0.14 per bushel. Therefore, the total cost of the options is $0.25 per bushel ($0.11 + $0.14).

This means that Farmer Jayne has a floor of $1.65 - $0.25 = $1.40 per bushel.

So, the total value of her crop is 20,000 bushels x $1.40 per bushel = $28,000.

However, since the options cost her $0.25 per bushel, she must subtract that from her total value:

$28,000 - ($0.25 x 20,000) = $23,000.

That means that her net floor is $23,000, or $1,150 per acre ($23,000 / 20 acres).

Therefore, the correct answer is B.

Farmer Jayne Bought a $1