Question

  AG BM 102 Part 1 You are a farmer in south-central Pennsylvania producing wheat for the...

  AG BM 102

Part 1

You are a farmer in south-central Pennsylvania producing wheat for the cash grain market. You have planted 100 acres of winter wheat in the fall of 2016 and you are wondering whether you should hedge your output. You expect a yield of at least 50 bushels per acre. Below is a table listing the range of the wheat basis in your area based on recent history.

South-central PA Wheat basis (cents per bushel)

Month

Average

JAN

43

FEB

41

MAR

40

APR

39

MAY

36

JUN

22

JUL

16

AUG

19

SEP

25

OCT

30

NOV

34

DEC

39

YEAR

32

You plan to sell your wheat in July 2017. The July 2017 futures price in Chicago as you prepare to plant the wheat is $5.00.

1.What is the price you would expect in your local area if the futures price is an accurate forecast of the Chicago price for when you plan to sell your wheat? What is your expected total revenue? Please show and explain your work.

2.If you want to use the futures market to hedge what would you do? Explain in detail what you would do and when.

3.It is now July 15 2017. The price of the July contract in Chicago is $5.50. The price offered by your local flour mill is $5.70. Your actual production is 5,500 bushels. You are ready to harvest and sell your wheat. Please explain exactly what you will do? Assuming a commission of 1 cent per bushel calculate how your hedge worked out? Please explain the result and show your work.

4.How does your total revenue with the hedge compare to what you would have received if you had not hedged your expected production? Explain what accounts for the difference.

Homework Answers

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Please explain on why that is the answer? Im trying to comprehend it. A pension fund...
Please explain on why that is the answer? Im trying to comprehend it. A pension fund manager who plans on purchasing bonds in the future: a. Wants to insure against the price of bonds falling. b. Can offset the risk of bond prices rising by selling a futures contract. C. Will take the long position in a futures contract. d. Will take the short position in a futures contract. A wheat farmer who must purchase his inputs now but will...
1. Back in May 2020, an ethanol plant’s risk manager looked at futures prices and considered...
1. Back in May 2020, an ethanol plant’s risk manager looked at futures prices and considered a hedge to lock in a price on part of her new-crop corn acquisition planned for mid-to-late October 2020. She saw that the December 2020 futures contract was trading at $3.20/bushel and she knew that the basis in mid-October—when she expected to take delivery of the corn in question and to lift the hedge (i.e., to offset her futures position)—has typically (most years) been...
You are considering the purchase one Telstra Ltd share on 1 July 2017. You will purchase...
You are considering the purchase one Telstra Ltd share on 1 July 2017. You will purchase the share on the ASX. a)      Use the Yahoo7 Finance website to find the beta for Telstra. b)      You will need a proxy for return on the market. To get this, calculate the return on the ASX 200 index for the year ended 30 June 2017. Use the Yahoo7 Finance website to collect the ASX 200 data. Show your workings. c)      You will need...
Suppose that you know today that you will be selling 15,000 bushels of corn a few...
Suppose that you know today that you will be selling 15,000 bushels of corn a few months from now. Additionally, you know that given the current cash price of $2.35/bu., you have the potential to profit. However, you are concerned that the price may move against you. You purchase a $2.50/bu. put option for $0.20/bu. and expect the basis to be $0.05 under. When you are ready to sell the corn, the cash and futures prices have decreased to $2.15/bu....
Your supervisor has asked you to research the following situation concerning Owen and Lisa Cordoncillo. Owen...
Your supervisor has asked you to research the following situation concerning Owen and Lisa Cordoncillo. Owen and Lisa are brother and sister. In May 2016, Owen and Lisa exchange business pickup trucks. Lisa gives up a blue pickup truck with an adjusted basis of $2,000 and a fair market value of $6,000. In return for this property, Lisa receives from Owen a red pickup truck with a fair market value of $5,500 and cash of $500. Owen’s adjusted basis in...
1. If you were able to put together a portfolio that completely eliminated all risk, what return would you expect to earn and why?
1. If you were able to put together a portfolio that completely eliminated all risk, what return would you expect to earn and why?This question is a real eye opener, in that with great risk can come great reward. The asset classes I can think of to present to me a zero-risk situation in the portfolio would be the following: Savings account, CD certificate, bonds, treasuries, and ponds. I expect to get minimal and low return on investment. Obviously the...
please show work thank you!!!!!!! 1. Bank of RGV is a successful regional bank with common...
please show work thank you!!!!!!! 1. Bank of RGV is a successful regional bank with common equity share outstanding 1 million. It pays $10 dividend each year and expected to grow 5% in period 1. The appropriate discount rate to reflect shareholder risk is 10%. Answer below question using below data pertains to Bank of RGV: Below numbers are in 1000’s. Balance sheet                                                      Income statement Cash                                                   $100                Interest income                                       $400                                        Securities investments                         $600                interest expense...
1) What would you prefer, an annual cash flow of $600 for 4 years, or a...
1) What would you prefer, an annual cash flow of $600 for 4 years, or a lump sum payment of $2,500 in year 4? Your discount rate is 4.25%. Please discuss. 2) Our refinery has a remaining life of 3 years, and is fully utilised processing 1.5 million barrels of crude oil per annum at a processing cost of $10.00 real per barrel. By modifying the refinery at a cost of $6 million we can reduce the processing cost to...
Problem 1 You are an internal audit manager in a central government department that pays subsidies...
Problem 1 You are an internal audit manager in a central government department that pays subsidies to agricultural businesses involved in the production of basic foodstuffs. You will soon be undertaking an internal audit of the claims processing unit in your department. In preparation for the assignment you are reviewing the audit file on the previous audit carried out three years earlier. You find the following extract from one of the previous internal audit’s planning schedules: • “The unit receives...
NOTHING UNIQUE TO OFFER During the past four months, George Vazquez has been putting together his...
NOTHING UNIQUE TO OFFER During the past four months, George Vazquez has been putting together his plan for a new venture. George wants to open a pizzeria near the local university. The area has three pizza enterprises, but George is convinced that demand is sufficient to support a fourth. The major competitor is a large national franchise unit that—in addition to its regular foodservice menu of pizzas, salads, soft drinks, and desserts—offers door-to-door delivery. This delivery service is very popular...