Ms. Widow Dirtscratcher leases out her farm near Egbert, Wyoming. She is concerned that wheat prices are going to soften. The market on the radio reported that Russia will buy no more wheat this year because of economic problems. If her share of this year's crop sells too low she might not get on her Branson. She needs to get at least $30, 000 gross to her share of bills on the farm and have enough left over to go on the trip. She has a crop share pay arrangement with the tenant (2/3 to the lessee, and 1/3 goes to her). Currently 500 acres are planted and tye yield averages 30 bushels to the acre. In February, the Widow has Finger sMeppelli coer her portion of the crop. She decides to go with a 640 strike price at a premium of $0.345/bu. Her grandson, who works for the University says basis should be about $0.25/under at harvest. A large system of storms wipes out most of the wheat crop in the Southern plains. Prices skyrocket. The Widow sells her wheat at the local elevator for $7.10 per bushel, and the underlying futures price is $6.90 when she does.
a) How many and what kind of options does the Widow purchase?
B) what is the expected target price when the order is placed?
c) Show the transactions in the cash and options market (use same format as presented in class).
d) What is the realized price after the sale is completed?
e) What was the basis when the marketing was done? f) Did basis narrow or widen compared to expectations?
g) Did the Widow get to go on her trip?