Question

The following questions use the table below about a grain elevator. One contract is for 5,000 bushels.

	Now	Later
Cash Corn Market	$6.25/bu	$6.60/bu
Futures Corn Market	$5.00/bu	$5.35/bu

1) Is the individual concerned about price increasing or decreasing?

2) What is the initial action in the futures market: buy or sell?

3) What is the cash price paid/received by the individual later?

4) Did the individual earn a profit or loss in this hedging situation? Enter profit or loss in the following blank.

5) What is the value (i.e. amount) of the profit/loss on the hedge for one contract (signs matter)?

6) What is the hedged price per bushel on this transaction?

7) If the individual didn't hedge, what would have been the price paid/received for the cash commodity?

8) The individual made the right decision to hedge: Yes or No.

9) What was the net selling price (or net purchasing price)?

Answer 1

1	Its concerned about Price increasing
2	Buy Futures
3	Price paid to Supplier later		33000
4	Earn Profit
5	Contract Size	5000
	Profit Per contract	1750	Positive
			(5000* (5.35-5))
6	Hedged Price	5
7	Price paid to Supplier			33000
	If no heding made
8	Right Decision- Yes
9	Net Pay(33000-1750)				31250