It isApril, and Hans Anderson is planting his barley crop nearPlunkett, 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 3 comma 000

3,000 tonnes of barley and sell it in October. Futures contracts are available for October delivery with a futures price of $ 200

$200 per tonne. Options with strike price of $ 200

$200 per tonne are alsoavailable; puts cost $ 16

$16 and calls cost $ 20

$20.

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 3 comma 000

3,000 tonnes) if the price of barley in October is asfollows:

i . $ 150

$150 pertonne; ii. $ 200

$200 pertonne; iii. $ 250

$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 all3,000 tonnes) if the price of barley in October is asfollows:

i. $ 150

$150 pertonne; ii. $ 200

$200 pertonne; iii. $ 250

$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

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 comma 000

$570,000. If his business goesbankrupt, 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 $ 800 comma 000

$800,000. If his business goesbankrupt, Hans's bank will foreclose and take his house and farm.

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

A.

Hans can take an intermediate position in futures on 3 comma 000

3,000 tonnes of barley for delivery in October.

B.

Hans can wait until prices rise in the future.

C.

Hans can take a long position in futures on 3 comma 000

3,000 tonnes of barley for delivery in October.

D.

Hans can take a short position in futures on 3 comma 000

3,000 tonnes of barley for delivery in October.

Your answer is correct.

b. Given the strategy in (a), what will be the total net amount received by Hans(for all 3 comma 000

3,000 tonnes) if the price of barley in October is asfollows:

i. $ 150

$150 pertonne: the total net amount received by Hans is

nothing

.

ii. $ 200

$200 pertonne: the total net amount received by Hans is

nothing

.

iii. $ 250

$250 pertonne: the total net amount received by Hans is

nothing

.

(Round your answers to the nearestdollar.)

Enter your answer in the edit fields and then click Check Answer.