You have a hog finishing operation. In November, you decide to buy 4 contracts of May corn
Question:
You have a hog finishing operation. In November, you decide to buy 4 contracts of May corn futures to lock‐in your input costs on 20,000 bushels of corn to be purchased in March, April and May.
I want you to complete the transaction, under three different scenarios; higher futures prices, lower futures prices and steady futures prices.
Fill in the blanks in the T‐diagram, showing the price you received in $/bushel or in gross sales revenues (price * quantity). Ignore brokerage costs.
Scenario #1: higher futures prices
Date | Cash | Futures | Basis |
November | Corn harvest is over and you are concerned about the possibility of corn costs rising next spring. | Buy 4 contracts of May corn futures to lock in a purchase price on corn to be fed in March, April and May. Futures price: $5.26 | Expected corn basis a local buying basis of ‐$0.30/bu., or 30 cents under the May contract. futures price + expected basis = expected price $5.26 + (‐$0.30) = $4.96 |
March | Buy 20,000 bushels of corn from local sources for $6.03/bu. | Offset the hedge ‐ sell May corn futures at $6.39/bu. | What is the corn basis in March? $/bu. _____________ |
Results | What did you pay for corn in the cash market? $/bu. _____________ $total _____________ | What was your gain or loss in the futures market? $/bu. _____________ $total _____________ | What final price did you pay for corn? $/bu. _____________ $total _____________ |
Scenario #2: lower futures prices
Date | Cash | Futures | Basis |
November | Corn harvest is over and you are concerned about the possibility of corn costs rising next spring. | Buy 4 contracts of May corn futures to lock in a purchase price. Futures price: $5.26 | Expected corn basis a local buying basis of 30 cents under the May contract. expected price = $5.26 + (‐$0.30) = $4.96 |
March | Buy 20,000 bushels of corn from local sources for $4.41/bu. | Offset the hedge ‐ sell May corn futures at $4.65/bu. | What is the corn basis in March? $/bu. _____________ |
Results | What did you pay for corn in the cash market? $/bu. _____________ $total _____________ | What was your gain or loss in the futures market? $/bu. _____________ $total _____________ | What final price did you pay for corn? $/bu. _____________ $total _____________ |
Scenario #3: steady futures prices
Date | Cash | Futures | Basis |
November | Corn harvest is over and you are concerned about the possibility of corn costs rising next spring. | Buy 4 contracts of May corn futures to lock in a purchase price. Futures price: $5.26 | Expected corn basis a local buying basis of 30 cents under the May contract. expected price = $5.26 + (‐$0.30) = $4.96 |
March | Buy 20,000 bushels of corn from local sources for $4.99/bu. | Offset the hedge ‐ sell May corn futures at $5.26/bu. | What is the corn basis in March? $/bu. _____________ |
Results | What did you pay for corn in the cash market? $/bu. _____________ $total _____________ | What was your gain or loss in the futures market? $/bu. _____________ $total _____________ | What final price did you pay for corn? $/bu. _____________ $total _____________ |
Advanced Accounting
ISBN: 978-0538480284
11th edition
Authors: Paul M. Fischer, William J. Tayler, Rita H. Cheng