Question 1 Suppose you purchased a 76.000 April lean hog put for 6.850. You expect basis...

Question 1

Suppose you purchased a 76.000 April lean hog put for 6.850. You expect basis will 2.50 over when you sell your hogs.

Calculate your minimum net selling price (Price floor).

For each of the April lean hog futures price determine your net selling price. The net/gain loss on the long put is intrinsic value – premium paid.

April Lean Hog Futures	Basis	Cash Price	Net gain/loss on put	Net selling price
74.675
113.375
81.225
91.350
72.125

Question 2

Suppose you sold an April lean hog futures at 79.400 to hedge the sale of your hogs. You expect basis will 2.50 under when you sell your hogs. For each of the April lean hog futures prices determine your net selling price.

April 15 Lean Hog Futures	Basis	Cash Price	Futures gain/loss	Net selling price
74.675
113.375
81.225
91.350
72.125

Expert Solution

Minimum Net Selling Price = Strike Price - Premium Paid = 76-6.85 = 69.15

April Lean Hog Futures	Basis	Cash Price (Over Basis means Cash Price is higher than futures price)	Net gain/loss on put (Option exercised, if cash price<76)	Net selling price (Cash Price+/- Gain/Loss in option)
74.675	2.5 over	74.675+2.5= 77.175	-6.85	77.175-6.85= 70.325
113.375	2.5 over	113.375+2.5= 115.875	-6.85	115.875-6.85= 108.936
81.225	2.5 over	81.225+2.5= 83.725	-6.85	83.725-6.85= 76.875
91.350	2.5 over	91.35+2.5= 93.85	-6.85	93.85-6.85= 87
72.125	2.5 over	72.125+2.5= 74.625	6.85-(76-74.625)= -5.475	74.625-5.475= 69.15

Answer 2

April 15 Lean Hog Futures	Basis	Cash Price (Under Basis means cash price is lower than futures price)	Futures gain/loss (Futures Selling Price i.e. 79.4 - Current Futures Prices i.e. 1st column)	Net selling price (Cash Price +/- Gain/Loss on Futures)
74.675	2.5 under	74.675-2.5= 72.175	79.4-74.675= 4.725	72.175+4.725= 76.9
113.375	2.5 under	113.375-2.5= 110.875	79.4-113.375= -33.975	110.875-33.975= 76.9
81.225	2.5 under	81.225-2.5= 78.725	79.4-81.225= -1.825	78.725-1.825= 76.9
91.350	2.5 under	91.35-2.5= 88.85	79.4-91.35= -11.95	88.85-11.95= 76.9
72.125	2.5 under	72.125-2.5= 69.625	79.4-72.125= 7.275	69.625+7.275= 76.9

jeff jeffy answered 6 months ago

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