1) A cereal farmer has a stock of wheat of 50 tonnes, and plans to sell...

1) A cereal farmer has a stock of wheat of 50 tonnes, and plans to sell them in a year. The spot price is € 100 / t, the 1-year interest rate is 1%, the cost of storing wheat is 0.5% of the value of the inventory, payable at maturity. What do you advise him to do if he wants to hedge against fluctuations in the price of wheat, and the one-year wheat price is € 100.5 / t? What is the “fair” price of wheat at one year?
2)A miller plans to buy 100 tonnes of wheat in a year. The spot price is € 100 / t, the 1-year interest rate is 1%, the cost of storing wheat is 0.5% of the value of the inventory, payable at maturity. What do you advise him to do if he wants to hedge against fluctuations in the price of wheat, and the one-year wheat price is € 102.5 / t? What is the “fair” price of wheat at one year?

Expert Solution

jeff jeffy answered 2 years ago

A cereal farmer has a stock of wheat of 50 tonnes, and plans to sell them in a year.

1) A cereal farmer has a stock of wheat of 50 tonnes, and plans to sell them in a year. The spot price is € 100 / t, the 1-year interest rate is 1%, the cost of storing wheat is 0.5% of the value of the inventory, payable at maturity. What do you advise him to do if he wants to hedge against fluctuations in the price of wheat, and the one-year wheat price is € 100.5 / t? What...

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