1. To plant and harvest 20,000 bushels of corn, Farmer Jayne incurs fixed and variable costs totaling $33,000. The current spot price of corn is $1.80 per bushel. What is the profit or loss if the spot price is $1.90 per bushel when she harvests and sells her corn?
$3,000 gain
$3,000 loss
$5,000 gain
$5,000 loss
2. A 6-month forward contract for corn exists with a price of $1.70 per bushel. If Farmer Jayne decides to hedge her 20,000 bushels of corn with the forward contract, what is her profit or loss if spot prices are $1.65 or $1.80 when she sells her crop in 6 months? Her total costs are $33,000.
$1,000 gain or $1,000 loss
$0 gain or $3,000 gain
$0 loss or $3,000 loss
$1,000 gain or $1,000 gain
3. Corn call options with a $1.75 strike price are trading for a $0.14 premium. Farmer Jayne decides to hedge her 20,000 bushels of corn by selling short call options. Six-month interest rates are 4.0% and she plans to close her position in 6 months. What is the total premium she will earn on her short position?
$2,800
$2,912
$800
$1,600
4. Corn call options with a $1.70 strike price are trading for a $0.15 premium. Farmer Jayne decides to hedge her 20,000 bushels of corn by selling short call options. She incurs fixed and variable costs totaling $33,000 for her corn. Effective 6-month interest rates are 4.0% and she plans to close her position and sell her corn in 6 months. What is her profit or loss if spot prices are $1.60 per bushel when she closes her position?
$1,000 loss
$2,000 gain
$2,120 loss
$2,120 gain
5. When selecting among various put options with different strike prices, in order to hedge a long asset position, which of the following statements is true?
Higher strike puts cost more and provide higher floors
Higher strike puts cost less and provide higher floors
Lower strike puts cost more and provide higher floors
Lower strike puts cost less and provide higher floors
6. Which of the following situations does NOT describe someone who should implement a hedging strategy?
Mary is very nervous about losing profits if selling prices drop
Melanie's creditors will not lend her money if her crops might lose money
Katherine's board of directors will not tolerate losses, even if it means profits are smaller
Dawn wants to reduce price fluctuations, but will need to conduct many transactions to achieve her goals
7. KidCo Cereal Company sells "Sugar Corns" for $2.50 per box. The company will need to buy 20,000 bushels of corn in 6 months to produce 40,000 boxes of cereal. Non-corn costs total $60,000. What is the company's profit if they purchase call options at $0.12 per bushel with a strike price of $1.60? Assume the 6-month interest rate is 4.0% and the spot price in 6 months is $1.65 per bushel.
$5,504 profit
$8,005 loss
$12,064 profit
$11,293 loss
8. Farmer Jayne decides to hedge 10,000 bushels of corn by purchasing put options with a strike price of $1.80. Six-month interest rates are 4.0% and the total premium on all puts is $1,200. If her total costs are $1.65 per bushel, what is her marginal change in profits if the spot price of corn drops from $1.80 to $1.75 by the time she sells her crop in 6 months?
$248 loss
$0
$2,52 gain
$1,500 loss