Refer to Table 23.1 in the text to answer this question. Suppose today is February 10, 2017, and your firm produces breakfast cereal and needs 145,000 bushels of corn in May 2017 for an upcoming promotion. You would like to lock in your costs today because you are concerned that corn prices might rise between now and May.

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 $3.69 per bushel in May. 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. 

Table 23.1

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Copper-High (CMX)-25,000 lbs; $ per Ib. Feb 2.6735 2.6735 2.6715 2.6480 -0.0125 672 March Gold (CMX)-100 troy oz; $ per troy oz. Feb April June Aug Dec June'18 Palladium (NYM)-50 troy oz; $ per troy oz. Feb March June Sept Platinum (NYM)-50 troy oz; $ per troy oz Feb 2.6660 2.6765 2.6410 2.6535 -0.0130 120,434 1239.40 1243.50 1226.90 1235.10 -2.50 1,387 1242.70 1246.20 1226.10 1236.80 -2.70 288,888 1246.10 1249.00 1230.00 1240.00 -2.70 63,531 1250.10 1252.00 1235.10 1243.10 -2.80 18,296 1254.00 1256.90 1239.00 1249.20 -2.70 29,516 1266.00 1266.00 1254.80 1259.00 -2.50 4,419 732.85 732.85 732.85 772.60 2.80 770.60 778.80 768.00 772.55 2.80 22,948 771.00 780.00 770.40 774.00 2.85 6,503 775.30 777.00 775.10 775.00 3.60 17 978.80 979.10 978.80 1019.20 2.80 42 April 1019.60 1032.10 1016.20 1022.20 2.80 59,479 Silver (CMX)-5,000 troy oz.; $ per troy oz.