None Six months from now, Farmer Don will harvest 20,000 bushels of wheat. In doing so, heincurs costs of $212,000. The current spot price of wheat is $10.90 per bushel, and theeffective six-month interest rate is 5 percent. Don has decided to hedge with a collar bypurchasing $10.70-strike puts and selling $11.10-strike calls on 20,000 bushels ofwheat. The puts have a premium of $0.65 per bushel, while the calls have a premium of$1.15 per bushel. What total profit would Don earn if the market price of wheat atharvest time is $10.30, $10.70, $11.10, and $11.50, respectively?$8,490; $16,490; $18,490; $18,490You Answered$-6,000; $2,000; $10,000; $18,000Correct Answer$17,000; $17,000; $17,000; $17,000$12,500; $12,500; $20,500; $20,500$-10,490; $-10,490; $-4,490; $3,510

Cost of harvesting = $212,000Total bushels = 20,000Call premium = $1.15Put premium = $0.65Risk-free…

Answered: Six months from now, Farmer Don will…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter21: Risk Management

Section: Chapter Questions

Problem 4P

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