It is April, and Hans Anderson is planting his barley crop near Plunkett, Saskatchewan. He is concerned about losing his farm if his operations result in a loss at the end of the season. He expects to harvest 3,000 tonnes of barley and sell it in October. Futures contracts are available for October delivery with a futures price of $200 per tonne. Options with strike price of $200 per tonne are also available; puts cost $16 and calls cost $18. a. Describe how Hans can fully hedge using futures contracts. b. Given the strategy in (a), what will be the total net amount received by Hans (for all 3,000 tonnes) if the price of barley in October is as follows: 1. $150 per tonne; li. $200 per tonne; li. $250 per tonne c. Describe how Hans can fully hedge using options. d. Given the strategy in (c), what will be the total net amount received by Hans (for all 3,000 tonnes) if the price of barley in October is as follows: 1. $150 per tonne; ii. $200 per tonne; ii. $250 per tonne

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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It is April, and Hans Anderson is planting his barley crop near Plunkett, Saskatchewan. He is concerned about losing his farm if his operations result in a loss at the end of the season. He expects to
harvest 3,000 tonnes of barley and sell it in October. Futures contracts are available for October delivery with a futures price of $200 per tonne. Options with strike price of $200 per tonne are also
available; puts cost $16 and calls cost $18.
a. Describe how Hans can fully hedge using futures contracts.
b. Given the strategy in (a), what will be the total net amount received by Hans (for all 3,000 tonnes) if the price of barley in October is as follows:
i. $150 per tonne; ii. $200 per tonne; iii. $250 per tonne
c. Describe how Hans can fully hedge using options.
d. Given the strategy in (c), what will be the total net amount received by Hans (for all 3,000 tonnes) if the price of barley in October is as follows:
i. $150 per tonne; ii. $200 per tonne; ii. $250 per tonne
e. Hans has asked for your advice regarding hedging. Discuss how the each of the following individually will influence your advice.
i. Hans does not expect to have much cash available between May and September.
ii. Hans thinks there is a 25% chance his crop will be destroyed by hail before he has a chance to harvest it.
iii. Hans's farming business will go bankrupt if his net revenues in October do not cover his costs. He estimates his costs will be $570,000. If his business goes bankrupt, Hans's bank will
foreclose and take his house and farm.
a. Determine how Hans can fully hedge using futures contracts.
O A. Hans can wait until prices rise in the future.
O B. Hans can take a long position in futures on 3,000 tonnes of barley for delivery in October.
c. Hans can take a short position in futures on 3,000 tonnes of barley for delivery in October.
O D. Hans can take an intermediate position in futures on 3,000 tonnes of barley for delivery in October.
b. Given the strategy in (a), what will be the total net amount received by Hans (for all 3,000 tonnes) if the price
barley in October is as follows:
i. $150 per tonne: the total net amount received by Hans is
ii. $200 per tonne: the total net amount received by Hans is
iii. $250 per tonne: the total net amount received by Hans is
(Round your answers to the nearest dollar.)
Transcribed Image Text:It is April, and Hans Anderson is planting his barley crop near Plunkett, Saskatchewan. He is concerned about losing his farm if his operations result in a loss at the end of the season. He expects to harvest 3,000 tonnes of barley and sell it in October. Futures contracts are available for October delivery with a futures price of $200 per tonne. Options with strike price of $200 per tonne are also available; puts cost $16 and calls cost $18. a. Describe how Hans can fully hedge using futures contracts. b. Given the strategy in (a), what will be the total net amount received by Hans (for all 3,000 tonnes) if the price of barley in October is as follows: i. $150 per tonne; ii. $200 per tonne; iii. $250 per tonne c. Describe how Hans can fully hedge using options. d. Given the strategy in (c), what will be the total net amount received by Hans (for all 3,000 tonnes) if the price of barley in October is as follows: i. $150 per tonne; ii. $200 per tonne; ii. $250 per tonne e. Hans has asked for your advice regarding hedging. Discuss how the each of the following individually will influence your advice. i. Hans does not expect to have much cash available between May and September. ii. Hans thinks there is a 25% chance his crop will be destroyed by hail before he has a chance to harvest it. iii. Hans's farming business will go bankrupt if his net revenues in October do not cover his costs. He estimates his costs will be $570,000. If his business goes bankrupt, Hans's bank will foreclose and take his house and farm. a. Determine how Hans can fully hedge using futures contracts. O A. Hans can wait until prices rise in the future. O B. Hans can take a long position in futures on 3,000 tonnes of barley for delivery in October. c. Hans can take a short position in futures on 3,000 tonnes of barley for delivery in October. O D. Hans can take an intermediate position in futures on 3,000 tonnes of barley for delivery in October. b. Given the strategy in (a), what will be the total net amount received by Hans (for all 3,000 tonnes) if the price barley in October is as follows: i. $150 per tonne: the total net amount received by Hans is ii. $200 per tonne: the total net amount received by Hans is iii. $250 per tonne: the total net amount received by Hans is (Round your answers to the nearest dollar.)
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