1.  Assume Farmer Smith is a corn producer and wants to look at hedging his crop. Calculate the expected hedge price if futures price in June and expected basis for the beginning of the respective months are as follows:

Future price in June expected basis expected hedge price

Dec. $6.20 -10 cents $6.10

Assume he hedges half of his production using ONE December futures contract, and offsets the hedge when he markets the cash commodity immediately after harvest.Calculate his net hedge price PER BUSHEL if futures and cash at harvest are as follows:

Cash/Futures	Futures Gain/loss on hedge	Net hedge price on hedged half of production	Average price for all production
6.40/6.80
6.60/6.80
6.80/6.80
5.40/5.80
5.55/5.80
5.70/5.80

Assume all production, hedged and unhedged, is sold at the cash price. Average the hedged half and the unhedged half to find the average price. Remember, one contract is 5,000 bushels and that is half of his production.

1. (9pts) Assume Farmer Jones is a cattle producer and wants to lock in a purchase price for the corn she will need to buy to feed her livestock. Calculate the expected hedge price if futures price in Feb and expected basis for the beginning of the months are as follows:

Future price in June expected basis expected hedge price

Dec. $6.20 -10 cents $6.10

Assume she hedges half of her expected needs using ONE Dec contract, and she offsets her hedge when she makes the cash purchase. Calculate her net hedge price PER BUSHEL if futures and cash end at the following:

Cash/Futures	Futures Gain/loss on hedge	Net hedge price on hedged half of expected needs	Average price for all expected needs
6.50/6.80
6.70/6.80
6.90/6.80
5.50/5.80
5.75/5.80
5.90/5.80

Assume all purchased corn, hedged and unhedged, is bought at the cash price. Average the hedged half and the unhedged half to find the average price. Remember, one contract is 5,000 bushels and that is half of his use.

1. (1 pt) Based on the numbers you have calculated above, is a stronger or weaker basis more beneficial to the short hedger? To the long hedger? Why?

1. (1 pt) Which has more of an impact on the net hedge price for the portion of production that is hedged, price level or basis level?

1. (8pts) Calculate the margin paid by each producer or to each producer if based on the following hedging results. Think about the first action taken for each hedge, buy or sell, and how that can result in a profit or loss from in their margin account. Think sell high, buy low.

Farmer Smith Beginning Hedge Prices

Futures 6.20 Basis -10 cents Expected Cash 6.10

Ending hedge prices

Cash/Futures Sell @ Buy @ # of bu. per contract Margin (gain/loss)

a) $6.40/6.80

1. $5.60/6.00 __________

Farmer Jones Beginning Hedge Prices

Futures 6.20 Basis -10 cents Expected Cash 6.10

Ending hedge prices

Cash/Futures Sell @ Buy @ # of bu. per contract Margin (gain/loss)

c) $6.20/6.40

d) $6.00/5.90

1. (1 pt) Does the ending cash price and/or basis have any impact on amount of margin paid or received?Why or why not?

1. (1 pt) If you have half of your production/needs hedged, and the other half is left on the cash market, are margin calls a good thing or a bad thing?

Answer rating: 100% (QA)

To calculate the expected hedge price net hedge price and margin paid for the given scenarios lets go through each question stepbystep 1 Calculate the expected hedge price for Farmer Smith Future pric... View the full answer