Risk Management: Consider a Wheat Farmer Who Expects to Produce

question 63

Multiple Choice

Risk management: Consider a wheat farmer who expects to produce 50,000 bushels of wheat at the end of this season. To hedge the risk associated with wheat prices, the farmer purchases put options to cover his entire crop. The put options have a strike price of $7.50 per and a premium of $0.30 per bushel. He also sells an equal amount of call options with a strike price of $7.50 per bushel and a premium of $0.43 a bushel. Which of the following statements is NOT correct?

• A) From this transaction the farmer can pocket $6,500 immediately.
• B) If wheat prices go up substantially, the farmer will earn more money.
• C) The put options guarantee that the farmer will receive at least $7.50 per bushel at the end of the season.
• D) The farmer has guaranteed that he will sell his wheat for $7.50 a bushel.

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