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May 21: A farmer expects a wheat crop of 5,000 bu. in July. The July futures price is $3.34 per bushel and his expected basis is -$.10. Put options for July wheat are trading at 15c/bu for the $3.40 strike price, and 22c/bu for the $3.50 strike price. The farmer is considering the following marketing strategies: 1) cash market only, 2) hedge using futures, 3) hedge using $3.40 options, and 4) hedge using $3.50 options. For each scenario below, find the net realized price.

You can assume that: a) there are no commissions, b) 5000 bushels are sold, c) the producer sells his wheat to the local elevator in the 3rd week of June - i.e. at the time the options expire. At expiration, the options will have zero time value, d) options or futures positions are initiated at the above prices on April 20.

1. Scenario 1. June 20: July futures @$3.14/bu. Local basis @ -$0.07/bu. What is the net price using strategy 1 (cash)?

2. Scenario 1. June 20: July futures @$3.14/bu. Local basis @ -$0.07/bu. What is the net price using strategy 2 (futures)?

3. Scenario 1. June 20: July futures @$3.14/bu. Local basis @-$0.07/bu. What is the net price using strategy 3 ($3.40 options)?

4. Scenario 1. June 20: July futures @$3.14/bu. Local basis @ -$0.07/bu. What is the net price using strategy 4 ($3.50 option)? 2

5. Scenario 2. June 20: July futures @ $3.34/bu. Local basis @ -$0.13. What is the net price using strategy 2 (futures)?

6. Scenario 2. June 20: July futures @ $3.34/bu. Local basis @ -$0.13. What is the net price using strategy 3 ($3.40 options)?

7. Scenario 2. June 20: July futures @ $3.34/bu. Local basis @ -$0.13. What is the net price using strategy 4 ($3.50 options)?

8. Scenario 3. June 20: July futures @ $3.55/bu. Local basis @ -$0.13. What is the net price using strategy 2 (futures)?

9. Scenario 3. June 20: July futures @ $3.55/bu. Local basis @ -$0.13. What is the net price using strategy 3 ($3.40 options)?

10. Scenario 3. June 20: July futures @ $3.55/bu. Local basis @ -$0.13. What is the net price using strategy 4 ($3.50 options)

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