On 1 November 2019 you harvested wheat and put 5,000 bushels into storage at the local elevator. You had not previously hedged any of this harvest. You decide to sell this grain on 1 March 2020 and hedge your price risk using the March futures contract. As expiration of the March contract approaches you decide if you will sell, as was your original intention, or if you will roll your hedge forward and sell in May instead. Assume that your local elevator is a delivery location of the futures contract so that you do not have to consider basis risk, and also assume that there are no commission charges for your futures transactions. The monthly storage cost is R0.15 per bushel. You are given the following information:

 

 

 

Date	Wheat Spot Price	Prices of March Futures	Prices of May Futures
1 November 2019	R10.30	R12.50	R12.70
1 March 2020	R12.45	R12.45	R12.85
1 May 2020	R12.82		R12.82

a)Determine the profit/loss if you sell wheat in March. 

b) Determine the profit/loss if you roll the hedge forward to May. 

c) Between the two investment strategies in (a) and (b), which one is better? Explain

Answer rating: 100% (QA)

a ProfitLoss if you sell wheat in March Spot Price 1 November 2019 R1030 Price of March Futures 1 No... View the full answer