A wheat famer is concerned about a potential glut of wheat next summer due to unusually warm weather and higher than expected rain fall.

Market: CME's SRW Wheat futures (Symbol ZW) contract is an efficient hedging contract.

1. Using CME's wheat futures complex, suggest a specific trade¹to address the famer's concern. Assume the famer produces on average two million bushels of wheat per year.

1. What is the contract value of one CME future contact if the current price per a one bushel of wheat is $7.56?

1. Assume the famer has a long-term contract to provide wheat to a large Chicago-based cereal producer at a price of 757'00 per bushel. How much profit or loss will the farmer recognize if correct hedge was executed. Assume the settlement price is 733'28. Your calculation should reflect the economics of the trade suggest in part a) above.

Answer rating: 100% (QA)

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