Farmer Brown grows wheat, and will be selling his crop in 6 months. The current price of
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Farmer Brown grows wheat, and will be selling his crop in 6 months. The current price of wheat is 8.50 per bushel. To reduce the risk of fluctuation in price, Brown wants to use derivatives with a 6-month expiration date to sell wheat between 8.60 and 8.80 per bushel. Brown also wants to minimize the cost of using derivatives.
The continuously compounded risk-free interest rate is 2%.
Which of the following strategies fulfills Farmer Brown’s objectives?
(A) Short a forward contract
(B) Long a call with strike 8.70 and short a put with strike 8.70
(C) Long a call with strike 8.80 and short a put with strike 8.60
(D) Long a put with strike 8.60
(E) Long a put with strike 8.60 and short a call with strike 8.80
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E In the absence of any hedging strategy Browns payof...View the full answer
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