Johanna is grain farmer in Grand Island, NE. Last fall, she decided to sell her corn before
Question:
Johanna is grain farmer in Grand Island, NE. Last fall, she decided to sell her corn before harvest for delivery in March 2023. On August 1, 2022 she sold her grain using futures contracts for March 2023 delivery. She locked in a futures price of $6.16/bu. Then, in March 2023 she delivered her grain, offset her hedge, got paid and was done with her corn harvested last year.
Now, after she delivered her grain in March 2023, her friend told her that she should have rolled her hedge forward to May 2023 delivery. According to her friend, she would have made more money if she had rolled her hedge. In fact, Johanna would have no problem in waiting until May 2023 to deliver her grain and get paid, as long as she had the opportunity to obtain a higher price at the end of the hedge. She just didn't consider doing it.
Let's see if her friend was right, i.e. let's see if Johanna should have rolled her hedge forward from March 2023 to May 2023 delivery.
[a] The chart below shows corn futures prices for March 2023 delivery (orange line) and May 2023 delivery (blue line) between 8/1/2022 (which was the day Johanna started her hedge) and 3/14/2023 (which was the last trading day for the futures contract for March 2023 delivery). Futures prices are in $/bu.
[e] Finally, assume that: the cost of carry for Johanna was $0.04/bu/month, and the transaction fee to trade futures contracts was $0.01/bu.
Question one
As explained above, Johanna placed her hedge on 8/1/2022 using futures contracts for March 2023 delivery. Then she harvested her grain in the fall and stored it. Let's say she stored her grain for 5 months after harvest. Moving forward, Johanna delivered her grain in the second week of March 2023 and offset her hedge.
Using the information provided above, calculate Johanna's realized price for this hedge. Remember to account for storage and transaction fees too.
Question two
Now, we also learned that Johanna's friend had said that she should have rolled her hedge forward from March 2023 to May 2023 delivery. Based on all information above, do you agree with Johanna's friend? Do you think that, at some point between 8/1/2022 (when she started her hedge for March 2023 delivery) and 3/14/2023 (last trading day of the futures contract for March 2023 delivery), it would have been more profitable for Johanna to have rolled her hedge forward? Explain your answer and make sure to take into account all variables involved in this decision.
Financial Reporting And Analysis
ISBN: 9781260247848
8th Edition
Authors: Lawrence Revsine, Daniel Collins, Bruce Johnson, Fred Mittelstaedt, Leonard Soffer