It's March, corn is currently trading at $450/tonne. Wilson Farms expects to require corn for livestock feed in January 2023 and decides to take positions in Jan '24 corn futures to hedge against price volatility. The futures is trading at $458/tonne. In October, the futures price has increased to $470/tonne while the spot price is $464/tonne. In January 2024, the contract trades at $480/tonne just before the last trading day on contract.

a) Describe the type of hedge used and the position entered in March.

b) Calculate the basis in March and then in October.

c) Assume the market is free of arbitrage in January 2024, the farm closes its futures positions and cash settles just before the last trading day while it simultaneously trades on the spot market. Assume the underlying is a perfect match for the farm, explain the steps of how the hedge is closed, show cash flows at each step, and calculate the net effective price for the farm.

d) What are the risks and benefits associated with hedging for an Australian farmer?

Answer rating: 100% (QA)

Corn Futures Hedge Analysis for Wilson Farms a Type of Hedge and Position Type Short hedge By taking ... View the full answer