4. [10 points]: A bread maker needs to purchase wheat in late June. Currently, the July wheat futures is trading at $4.97 per bushel. The bread maker chooses to hedge through options on July wheat futures. The premiums for the options ($/bu) are given in the table below. Strike Price $4.70 $4.80 $4.90 $5.00 $5.10 $5.20 CALL Option $0.47 $0.42 $0.34 $0.29 $0.25 $0.22 PUT Option $0.17 $0.21 $0.26 $0.31 $0.37 $0.44 a. What type of option should the bread maker purchase? b. Would the bread maker get better price protection with a lower strike price or a higher strike price? c. Suppose the bread maker purchases the option you recommended in (a) with a strike price of $4.90. By late June the July wheat futures is trading at $5.40/bu and the basis is $0.25 under the futures (assume US$=C$). What is the profit or loss from the option position? What is the net cash price for the bread maker? d. If the bread maker had purchased the option with a strike price of $5.20, would he have ended up with a better net cash price than in (c)? Show your work. e. Would the result in (d) regarding the strike price that resulted in the better net cash price be different if the futures price had declined by late June instead of increased? Explain. 4. [10 points]: A bread maker needs to purchase wheat in late June. Currently, the July wheat futures is trading at $4.97 per bushel. The bread maker chooses to hedge through options on July wheat futures. The premiums for the options ($/bu) are given in the table below. Strike Price $4.70 $4.80 $4.90 $5.00 $5.10 $5.20 CALL Option $0.47 $0.42 $0.34 $0.29 $0.25 $0.22 PUT Option $0.17 $0.21 $0.26 $0.31 $0.37 $0.44 a. What type of option should the bread maker purchase? b. Would the bread maker get better price protection with a lower strike price or a higher strike price? c. Suppose the bread maker purchases the option you recommended in (a) with a strike price of $4.90. By late June the July wheat futures is trading at $5.40/bu and the basis is $0.25 under the futures (assume US$=C$). What is the profit or loss from the option position? What is the net cash price for the bread maker? d. If the bread maker had purchased the option with a strike price of $5.20, would he have ended up with a better net cash price than in (c)? Show your work. e. Would the result in (d) regarding the strike price that resulted in the better net cash price be different if the futures price had declined by late June instead of increased? Explain