Suppose the current spot price of corn is $20 a bushel. A corn farmer expects to produce 2,000 bushels at the end of the season, and she wants to ensure that she gets at least $18 per bushel. Call options on 1,000 bushels of corn with a strike price of $15 and an expiration date at the end of the season are selling for $3,000. By selling call options on her corn crop, the farmer can guarantee that she gets at least $18 per bushel.

Question

Quizplus · Accepted Answer

Selling call options does not guarantee a minimum sale price of $18 per bushel for the farmer; it involves giving someone else the right to buy her corn at the strike price. To guarantee a minimum price, the farmer would need to buy put options, not sell call options.

Suppose the Current Spot Price of Corn Is $20 a Bushel