You are a corn grower. As the planting season begins in the spring, you want to price
Question:
You are a corn grower. As the planting season begins in the spring, you want to price 50% of your expected crop. You know the following:
• The local elevator is bidding $4.56 for corn delivered today
• The local elevator is bidding $4.03 for corn delivered at harvest
• May corn futures (the nearby contract) are priced at $4.91
• December corn futures are trading at $4.54 per bushel
• December 450 put options are trading at 35 cents per bushel
• Over the past three years, your basis has averaged 40 cents under December futures at harvest.
1. What is the nearby corn basis?
____________________
2. What is the basis for corn delivered at harvest?
____________________
3. What price will you receive for your corn using a forward contract?
____________________
4. If you used futures contracts to hedge new crop corn, what price would you expect to receive for your corn at
harvest? Ignore brokerage fees.
____________________
5. What minimum price would you establish (based on your expected basis) for your corn by purchasing the 440
put options? Ignore brokerage fees.
____________________
Fundamentals of corporate finance
ISBN: 978-0470876442
2nd Edition
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates