1.) Suppose you are a farmer who sells wheat on the spot market. Your harvest is scheduled to be ready for shipment on 09/01/2020, and you expect to have 10 million bushels. The size of one wheat futures contract is 100 bushels. To eliminate your wheat price exposure, how many contracts should you initiate on 03/15/2020 (long is positive and short is negative) ?

2.) In the question above, if you take a September 15th future to hedge and the 6-month Treasury yield is 2%, wheat storage costs are 2.5%, the convenience yield is 0.5% (they all are continuously compounded), and the current spot price of wheat is $4.86/bushel, what is the futures price of the contract that you chose?

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Answer rating: 100% (QA)

1 To eliminate the wheat price exposure the farmer needs to take a short position ... View the full answer