(a) In August, a wheat farmer decided to hedge her entire anticipated 1,000 tonne wheat harvest with...
Question:
(a) In August, a wheat farmer decided to hedge her entire anticipated 1,000 tonne wheat harvest with January wheat futures that were trading at a price of $290 per tonne.
In January, the farmer harvested 1,000 tonne of wheat and sold this wheat at auction for $270 per tonne. She then closed out her January wheat futures contracts for $272 per tonne.
From this information and using a standard wheat futures contract size of 20 tonne per contract, calculate the overall value of the harvested crop including the profit or loss from futures trading.
(b) On 11 April 2018, Commonwealth Bank of Australia (CBA) shares were trading at $74.00 while the October 2018 CBA Call and Put options with exercise prices of $80.00 were trading at $0.80 and $5.00, respectively.
Given this information and the fact that the standard option contract size is 100 shares per contract, outline an option arbitrage trading strategy, demonstrate that the strategy is profitable and briefly discuss the effect your arbitrage trading has on your ability to continue to make arbitrage profits.