Question: Problem 2 (Risk Management). Consider a farmer in the USA who raises and sells corn. The farmer incurs costs of $360/bushel. The corn price today

Problem 2 (Risk Management). Consider a farmer in the USA who raises and sells corn. The farmer incurs costs of $360/bushel. The corn price today is S(0) = $400/bushel. The 1-year continuously compounded risk-free interest rate is 5%. In your answers consider future corn prices S(T) = {300,350,400,450,500}. a) If the farmer does nothing to manage the corn price risk, what is his pro t per bushel of corn 1 year from now? b) What will be the farmer's pro t if he sells forward his expected corn production? Assume that the forward price equals $408/bushel. Construct graphs illustrating both unhedged and hedged pro t. c) What will be the farmer's pro t if he buys a put option with strike K1 = $380/bushel and sells a call option with K2 = $440/bushel. Assume that the put option price equals $12 and the call option price equals $19. Construct graphs illustrating both unhedged and hedged pro ts.

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