Derivatives Markets:
To plant and harvest 20,000 bushels of corn, Farmer incurs fixed and variable costs totaling $33,000 at the time of the harvest. The current spot price of corn is $1.80 per bushel and the six-month interest rate is 4.0%. Farmer will harvest and sell her corn in 6 months. Farmer has the opportunity to hedge all 20,000 bushels using put options with strike price $1.80 for a total cost of $2,400
a) Farmer bought $1.70 strike put options for $0.11 and sold $1.75 strike call option for a premium of $0.14. What is the floor in her strategy?
b) A $1.75 strike call option has a $0.14 premium and the $1.75 strike put option premium is $0.12. What is the net cost for Farmer to create a synthetic short forward contract?