Farmer Jill grows corn and it costs $2 per bushel to grow the corn. Jill is worreid about the fall in the price of corn. Jill would like to hedge 10,000 bushels of corn by buying 10,000 put options on corn. The 1-year put option with a strike price of $2.50 per bushel is priced at $0.05. The 1-year interest rate is 5%.
a) Create the table and graph in excel to show the hedged profit in one year. What is her minimum and maximum gain?
b) Suppose Jill hedges the 10,000 bushels of corn by buying 10,000 put options on corn and selling 10,000 call options on corn. Create the table and graph in excel to show the hedged profit in one year if the 1-year put option with a strike price of $2.50 per bushel is priced at $0.03 and the 1-year call option with a strike $2.75 per bushel is priced at $0.02. What is her minimum and maximum gain?
c) Compare the graphs in part (a) and part (b) and explain why Jill might sell call options along with buying put options to hedge her position.