Suppose you are a farmer and produce wheat. This is August and you are worried about a price decline in wheat price when you sell your crop in September. The spot price of wheat is $2.25/bushel and the September futures price is $2.52/bushel. Each contract is for 5,000 bushels. At the current spot price of $2.25/bushel, you expect to just break-even (zero profits). 

a. If you expect to have 60,000 bushels of wheat what would you do to ensure positive profits? What kind of hedge is it?

b. Suppose at the harvest time in September the spot price is $1.70/bushel and you have a hedged position as in part (a). What is your profit/loss if your actual production turns out to be 50,000 bushels?

Solve this question with a detailed explanation and calculation process, show the formula you use.

 

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a Hedging Strategy to Ensure Positive Profits To ensure positive profits you can use a futures contr... View the full answer