Farmer Jayne decides to hedge 10,000 bushels of corn by purchasing put options with a strike price of $1.80.Six-month interest rates are 4.0% and the total premium on all puts is $1,200.If her total costs are $1.65 per bushel,what is her marginal change in profits if the spot price of corn drops from $1.80 to $1.75 by the time she sells her crop in 6 months?
A) $248 loss
B) $0
C) $252 gain
D) $1,500 loss

Question

Quizplus · Accepted Answer

The put options allow Farmer Jayne to sell corn at $1.80, so she avoids the loss from the price drop to $1.75. Her costs are $1.65 per bushel, and she pays a $1,200 premium for the options. The profit per bushel is $1.80 - $1.65 = $0.15, and the total profit is 10,000 * $0.15 = $1,500. After subtracting the $1,200 premium, the net profit is $300, which is the same as if the price had not dropped, resulting in no marginal change in profits.

Farmer Jayne Decides to Hedge 10,000 Bushels of Corn by Purchasing