Question

A farmer produces 10,000 bushels of corn per season, which he sells in September. A good friend of his suggested he sells the whole production in the future's market. The settlement price of the corn futures contract for september is 403.4 (or 403'4 in CME parlance). The projection indicates the spot price of corn in September will either be 3.5 or 4.5 Dollars per bushel with equal pribability. The farmer is very weary of selling it all in the futures market. What proportion of the production should he sell in the futures market and should he take the Long or the Short? Calculate the Farmer's gains and losses associated with however many futures are needed. Do all the research needed to answer this question.

Answer 1

Number of bushels produce = 10000 bushels of corn.
Future price = 403.4
Contract size is = Number of bushels produce x Future price = 10000 x 403.4 = $4,034,000
Gain if the price falls $3.5 per bushel = 3.5 x 10000 = $35000
Gain if the price falls $4.5 per bushel = 4.5 x 10000 = $45000
45000 $ is maximum gain
As spot price of corn in September will either be 3.5 or 4.5 Dollars per bushel with equal probability, farmer is very weary of selling it all in the futures market so adopt first short position i.e, to sell full contract size of 10000 bushels @ 403.4 $ today and in September when price falls between 3.5 and 4.5 dollars per bushel, it results gain to farmer as he sells the bushels at high price.