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.

---

Definitions:

Natural Medium

A term used to describe materials or environments that occur in nature and are used to convey information or artistic expression.

Communicators

Individuals or entities that convey information or messages to others through various means.

Microblogs

Platforms or services that allow users to publish short messages or updates, often used for social networking or news dissemination.

Microblogging Systems

Platforms that allow users to post and interact with short, quick messages, facilitating rapid communication and sharing.