Consider a corn farmer, who will harvest 20,000 bushels of corn in 3 months. Using the...

Consider a corn farmer, who will harvest 20,000 bushels of corn in 3 months. Using the proceeds from the sale of his corn, he plans to pay back a loan in the amount of $140,000 that is due in 3 months. The price of corn today is $7 per bushel. Yet, the farmer receives some news indicating that the price of corn might substantially change within the next 3 months. The farmer gets nervous, as an adverse price change in corn price might render him unable to make his payments. Which of the following alternatives would/wouldn’t you recommend to him? a) Buy futures contracts for 20,000 bushels with a futures price of $7 and delivery in 3 months. b) Sell futures contracts, as they are outlines in the previous alternative. c) Buy European put options for 20,000 bushels with a strike price of $2 per bushel. Explain your answers for each part by describing his profit/loss in various states of the world.

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jeff jeffy answered 2 years ago

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