Question

A farmer enters into a forward contract with a baker for the sale of wheat at...

  1. A farmer enters into a forward contract with a baker for the sale of wheat at a price of $7 per bushel for 10,000 bushels to be delivered one month from now. (6 pts.)
    1. What is the face value of the contract?
    1. What will happen on the delivery date?
    1. Who is taking a long position and who is taking a short position in this transaction? Explain.

Homework Answers

Answer #1

(A) Face value of the contract is the total value of Bushels price as per contract = 10,000 * $7 = $70,000

(B) On the delivery date either the contract can be settled on gross or net basis. In gross basis, the farmer will deliver the Bushels and collect the money. In net position, Farmer can settle the difference between the price of Bushel on the date of delivery with the forward rate. Example, if price on the date is $6, Farmer will receive net $1 from the Forward seller.

(C) Farmer will be selling the bushel, thus he has a short position. The other person buying the bushel would have a Long position.

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