A Farmer Sells Futures Contracts at a Price of $2

question 57

Multiple Choice

A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn.
-Ignoring the transaction costs,how much did the farmer improve his cash flow by hedging sales with the futures contracts?

• A) $0
• B) $2,000
• C) $31,875
• D) $33,875

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Definitions:

Cash Flows

The aggregate quantity of cash flowing both in and out of a corporation, impacting its liquid assets.

Target Balance

A predetermined amount of money that a company or individual aims to have in an account at any given time.

Minimum Balance

The least amount of money that a bank requires a customer to have in an account to qualify for specific services or to avoid certain fees.

BAT Model

BAT Model stands for the Behavioral Analysis and Therapy Model, which is typically related to psychology and behavioral sciences, not a common term in finance and hence might be mistaken or the context misidentified.