Question 3 (6.5 points): Hedge October 15th: A producer plans to sell wheat in early July; currently, July wheat futures are trading at 680'6. The expected basis is $0.60 under. July 1 • Does the producer have a long or short cash position? Does the producer have a long or short futures position? To hedge: The producer will per bushel. What is the expected cash price? (buy/sell) July wheat futures at 680'6 ⚫ The producer must (buy/sell) wheat locally in the cash market at 562'2 per bushel. To offset their future position, they must. 599'4 per bushel. • What is the actual basis? • (buy/sell) July futures at 。 Was the basis stronger, weaker, or the same as expected? What is the realized price for the producer? Method 1: 。 Method 2: 。 The hedge resulted in a realized price of

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2. Thomas is considering buying an artificial Christmas tree. The tree costs $285 and is expected to last six years. The alternative is to keep purchasing natural trees, which currently cost $35 (Christmas year 0) and are expected to increase $5 in price each of the subsequent years, e.g. +$40, +$45, +$50, etc. Note: Draw two cash flow diagrams for this problem. a. What decision would you advise regarding the two options? b. What additional information may be useful or necessary in order to make a decision? c. Which option is the better choice? Why?