It is April, and Hans Anderson is planting his barley crop near Plunkett, Saskatchewan. He is concerned about losing his farm if his operations result in a loss at the end of the season. He expects to harvest 3000 tonnes of barley and sell it in October. Futures contracts are available for October delivery with a futures price of $200 per tonne. Options with strike price of $200 per tonne are also available; puts cost $15 and calls cost $18.

a. Describe how Hans can fully hedge using futures contracts.

b. Given the strategy in (a), what will be the total net amount received by Hans (for all 3000 tonnes) if the price of barley in October is as follows:

i. $150 per tonne

ii. $200 per tonne

iii. $250 per tonne

c. Describe how Hans can fully hedge using options.

d. Given the strategy in (c), what will be the total net amount received by Hans (for all 3000 tonnes) if the price of barley in October is as follows:

i. $150 per tonne

ii. $200 per tonne

iii. $250 per tonne

e. Hans has asked for your advice regarding hedging. Discuss how the each of the following individually will influence your advice.

i. Hans does not expect to have much cash available between May and September.

ii. Hans thinks there is a 25% chance his crop will be destroyed by hail before he has a chance to harvest it.

iii. Hans’s farming business will go bankrupt if his net revenues in October do not cover his costs. He estimates his costs will be $570,000. If his business goes bankrupt, Hans’s bank will foreclose and take his house and farm.

iv. Hans’s farming business will go bankrupt if his net revenues in October do not cover his costs. He estimates his costs will be $700,000. If his business goes bankrupt, Hans’s bank will foreclose and take his house and farm.