What is the maximum buying price for wheat

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Reference no: EM133297765

Part 1: A miller wants to establish a maximum buying price for wheat. It is May 19th and he needs to buy the product on August 15th. He also wants to be able to take advantage of potentially lower wheat prices between May and August. To do so, he buys one $6.00/bu September Wheat Call for $0.50 when September futures trade at $6.35/bu. The expected local basis in August is $0.05/bu above futures.

What is the maximum (expected) buying price for wheat. Is the option "in the money" on May 19th? Why?
On August 15th, when the miller buys wheat, the basis is $0.25/bu above futures, which trade at $6.55/bu. The $6.00/bu September Call Wheat is trading at $0.65. What is the intrinsic value of the $6.00/bu September Wheat Call on August 15th? If the IV was $0.35 on May 19th, did the IV increase or decrease?
On August 15th, when the miller buys wheat, the basis is $0.25/bu above futures, which trade at $6.55/bu. The $6.00/bu September Call Wheat is trading at $0.65. What is the time value of the $6.00/bu September Wheat Call on August 15th? If the TV was $0.15 on May 19th, did the TV increase or decrease?
Would the miller be better off exercising the option or offsetting his position by selling the Long Call back? Why?
What if the price of the contract in August was $5.95/bu? What should the miller do in this circumstance? What is the actual buying price? Why?

Part 2: On September 15th, a corn grower wants to protect their profits from the upcoming harvest by establishing a minimum selling price for his corn. To do so, he buys a $5.60/bu December Corn Put for $0.60 when the price of the December Corn contract is $5.30/bu. The expected local basis in November is $0.20 /bu above futures.

What is the intrinsic value and time value of the December Put on September 15th. Is the option "in the money" or "out of the money?"
What is the minimum (expected) selling price for corn?
As the delivery date in December approaches, the price of the contract is $5.45/bu and the premium of the $5.60/bu December Corn Put is $0.15. What should the farmer do? Why?

Reference no: EM133297765

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