A Small Soybean Farmer Wants to Hedge the Price Risk

question 17

True/False

A small soybean farmer wants to hedge the price risk of his next crop, but he is financially constrained. He can't raise capital by either borrowing money or selling his current assets. Instead, he sells call options on his soybean crop with a strike price of $14 per bushel at a premium of $0.50 a bushel. Using the proceeds from selling the call options, he buys put options on his soybean crop with a strike price of $11.00 per bushel at a premium of $0.35 per bushel. Assume the risk-free interest rate is 0 percent. By taking these derivative positions, the farmer has guaranteed that he will earn somewhere between $14.15 and $11.15 per bushel.

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Definitions:

Median

The middle value in a dataset when it is sorted in ascending order, or the average of the two middle values when the set is even.

Even Number

An even number is an integer that is exactly divisible by 2, such as 2, 4, 6, and so on.

Formula

A mathematical relationship or rule expressed in symbols.

Calculating Mean

The process of finding the average value of a set of numbers by adding them all up and dividing by the number of numbers.