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

question 87

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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Definitions:

Kyoto Protocol

A commitment by Canada and other countries to reduce greenhouse gas emissions.

United Nations Framework Convention

An international treaty designed to address complex global issues through the establishment of a legally binding agreement among nations, such as the United Nations Framework Convention on Climate Change.

Climate Change

The long-term alteration of temperature and typical weather patterns in a place, largely driven by human activities such as burning fossil fuels.

Security Interest

A legal claim or lien on collateral that has been pledged, usually to secure repayment of a loan.