Question: Refer to Table 25.2 in the text to answer this question. Suppose today is November 22, 2011, and your firm produces breakfast cereal and needs

Refer to Table 25.2 in the text to answer this question. Suppose today is November 22, 2011, and your firm produces breakfast cereal and needs 140,000 bushels of corn in March 2012 for an upcoming promotion. You would like to lock in your costs today because you are concerned that corn prices might go up between now and March.

a. How could you use corn futures contracts to hedge your risk exposure? What price would you effectively be locking in based on the closing price of the day?

b. Suppose corn prices are $6.13 per bushel in March. What is the profit or loss on your futures position? Explain how your futures position has eliminated your exposure to price risk in the corn market.

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