Assume you are in November, and the spot wheat price is $6.9/bushel which is a breakeven...

 

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Assume you are in November, and the spot wheat price is $6.9/bushel which is a breakeven price for you. If you don't buy today, you may gain by buying in December conditional on possible price falls. You are comparing possible outcomes of hedging by purchasing a December wheat futures contract at $6.50/bushel and hedging with buying a $6.50 wheat call option for 15 cents. (For full credit show your work) December wheat futures $6.00 $6.30 $6.60 $6.70 $7.00 Basis ($) -$0.15 -$0.15 +$0.05 +0.15 +0.15 Call option premium ($) $0.02 $0.03 $0.35 $0.50 $0.55 Total return of hedging with long futures ($) Total return of hedging with the long call(S) Assume you are in November, and the spot wheat price is $6.9/bushel which is a breakeven price for you. If you don't buy today, you may gain by buying in December conditional on possible price falls. You are comparing possible outcomes of hedging by purchasing a December wheat futures contract at $6.50/bushel and hedging with buying a $6.50 wheat call option for 15 cents. (For full credit show your work) December wheat futures $6.00 $6.30 $6.60 $6.70 $7.00 Basis ($) -$0.15 -$0.15 +$0.05 +0.15 +0.15 Call option premium ($) $0.02 $0.03 $0.35 $0.50 $0.55 Total return of hedging with long futures ($) Total return of hedging with the long call(S)

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