A farmer currently holds 6,000 bushels of corn. The local mill is offering a price of $3.25
Question:
A farmer currently holds 6,000 bushels of corn. The local mill is offering a price of $3.25 per bushel. Currently, a three-month futures contract is trading at $3.45. The farmer is considering selling to the local mill or holding the corn in inventory and selling a futures contract now. The farmer can store and insure the corn at a cost of 18 cents per bushel per annum to be paid monthly in advance at the beginning of each month. Interest rates are 9%, continuously compounded.
(a) Calculate total carrying cost of 6,000 bushels of corn.
(b) What is the theoretical price for a three-month futures contract.
(c) What is the best strategy for the farmer to minimize risk and maximize gain? Explain why.
(d) What is the basis today?
Financial Reporting and Analysis
ISBN: 978-0078025679
6th edition
Authors: Flawrence Revsine, Daniel Collins, Bruce, Mittelstaedt, Leon