It is January and the cash market price of corn is $6.00/bu. A futures contract for December delivery is $6.40 indicating a basis of $0.40. In checking prices on his computer, Edwin finds that he can buy a put option on a December futures contract with a strike price of $6.50 for a $0.35/bu. premium. Now further assume that when Edwin harvests his corn in late October, the basis on the December futures contract has fallen to $0.10/bu.
a. Suppose that by harvest time the cash price of corn has fallen to $4.00/bu. What are Edwin's total receipts from sales in the cash market and transactions in the options and futures markets?
b. In the case above, would Edwin have been better off if he had hedged than he was with a put option strategy? Why?
c. Suppose that by harvest time the cash price of corn has risen to $8.00/bu. What are Edwin's total receipts from sales in the cash market and transactions in the options and futures markets?
d. In the case above, would Edwin have been better off if he had hedged than he was with a put option strategy? Why?