Suppose a Farmer Has 100,000 Bushels of Corn to Sell

question 41

Essay

Suppose a farmer has 100,000 bushels of corn to sell in March to finance spring planting. The current price of corn is $2.40, which he thinks is too low, but he is worried about further price declines. He looks in the paper and sees corn futures for delivery of 5,000 bushels in March priced at 258 cents per bushel. Using this information, answer each of the following: (A) Describe the hedge the farmer would put in place in this case along with the cash flows that are expected to occur as a result; (B) Assume the market price in March ends up at $2.25 per bushel, and that rather than deliver the corn on the futures contract, the farmer closes out his futures position at 225 cents per contract and then sells his corn to his local elevator for $2.25 per bushel. Based on your hedge in part (A) compute the farmer's gains and losses on the hedge and discuss whether the hedge worked or not. (Ignore storage costs, transactions costs, etc.)

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