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A textile company needs 250000 bushels of cotton in September 2020 for the upcoming season. The...

A textile company needs 250000 bushels of cotton in September 2020 for the upcoming season. The company would like to lock in its costs. The cotton futures price for September delivery is $6.418 per bushel today. How the company can hedge its position? (Purchase or sell) What total cost would you effectively be locking in based on the closing price of the day?

Purchase; -250000

Sell; 1604500

Purchase; 1604500

Sell; -1604500

Purchase; 250000
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Answer #1

The correct answer is Purchase; 1604500

The textile company needs 250000 bushels of cotton in September 2020 for the upcoming season. The company is afraid of cotton prices rising. Thus in order to hedge its position it needs to purchase cotton futures. Therefore whatever the cotton price be at September the company will have to pay $6.418 per bushel.
The total outflow of the company on account of purchase of cotton futures will be 250,000 bushels @ $6.418 bushel.

= 250,000 * $6.418

= $1,604,500

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