You are a potato farmer. In 6 months, you will harvest 10,000,000 lbs of potato. There is currently no active potato future contract, and you want to hedge the price of potato. You did some research and found that corn future can be a good hedge for potato. A corn future is for 5,000 bushel and each bushel weighs 60lbs. The current 6-month corn future contract is trading at $6.45 (each contract is multiple of 5000 bushel, hence each contract is worth 6.45*5000 = $32,275). Daily corn future price has a .94 correlation with potato price; daily corn future volatility/standard deviation is 1.24% and daily potato price volatility/standard deviation is 1.36%. 1. How can you hedge your potato price? 2. Calculate the hedge ratio? 3. Calculate the number of contracts you will need to hedge, assuming you can transact fraction of a contract.

A farmer sows a certain crop. It costs $240,000 to buy the seed, prepare the ground, and sow the crop, In one year's time it will cost $123,200 to harvest the crop. The farmer's best estimate is that the crop will be worth $380,000 in one year. The farmer can borrow and lend at an interest rate is 7%. Part B) The farmer is concerned about the uncertainty surrounding the price that she will receive for her harvested crop in one year. She has the opportunity to enter into a forward agreement whereby she can lock-in a sale price of $405,000 for her harvested crop in one year, thus eliminating any uncertainty. The cost entering into this contract is $23,500, payable today. Should the farmer enter into this forward agreement and lock-in the sale price of her harvested crop? O A. Yes, she should enter into this agreement. O B. No, she should not enter into this agreement,

This question has multiple parts. A farmer sows a certain crop. It costs $240,000 to buy the seed, prepare the ground, and sow the crop. In one year's time it will cost $123,200 to harvest the crop. The farmer's best estimate is that the crop will be worth $380,000 in one year The farmer can borrow and lend at an interest rate is 7%. Part A) The net present value (NPV) of the farmer's decision to proceed with this investment is closest to which of the following? O A. $240,000 O B. $595,140 O C. $115,140 O D. $0

A farmer is currently growing wheat and plans to sell it in September next year. He needs to plan his budget now, because of upcoming expenses. Suppose that the futures price of wheat for September delivery is £100 per ton. There is 50% probability that the spot price of wheat in September will be £90 per ton or £110 per ton. Suppose that the farmer is not certain about the quantity of wheat he will sell in September. For each possible price of wheat, there are two equally likely quantities, i.e., there are four equally likely price-quantity pairs, which are shown in the Table that is attached as an image below. Based on the above information and table attached in the images, please design a hedging strategy that minimizes the variance of the farmer’s revenue in September.