Suppose that you are a wheat farmer. Answer the following questions.

a. It is September, and you intend to have 50,000 bushels of wheat harvested and ready to sell in November. The current spot market price of wheat is $2.50 per bushel, and the current December futures price of wheat is $2.75 per bushel. Should you buy or sell wheat futures? If each wheat futures contract is for 5.000 bushels, how many contracts will you buy or sell, and how much will you spend or receive in buying or selling futures contracts?

b. It is now November, and you sell 50,000 bushels of wheat at the spot price of $2.60 per bushel. If the futures price is $2.85 and you settle your position in the futures market, what was your gain or loss on your futures market position? Did you completely hedge your risk from price fluctuations in the wheat market? Give a numerical explanation.

Answer rating: 100% (QA)

a In this case the farmer would sell the futures contract at 275 per bushel as he expects that the ... View the full answer