Question

Six months from now, Farmer Larry will harvest 25,000 bushels of corn. In doing so, he incurs costs of $111,000. The current spot price of corn is $4.90 per bushel, and the six-month forward price is $5.05. Suppose Larry decides to sell corn forward. What total profit would he earn if the market price of corn at harvest time is $4.30, $4.70, $5.10, and $5.50, respectively?

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Answer #1

Statement showing profit/loss in forward market

Price as at expiry | ||||

Particulars | 4.30 | 4.7 | 5.1 | 5.5 |

Sell Forward contract @ | 5.05 | 5.05 | 5.05 | 5.05 |

Profit/loss on forward contract | 0.75 | 0.35 | -0.05 | -0.45 |

Number of bushel | 25000 | 25000 | 25000 | 25000 |

Profit/loss | 18750 | 8750 | -1250 | -11250 |

Statement showig total profit and loss

Price as at expiry | ||||

Particulars | 4.30 | 4.7 | 5.1 | 5.5 |

Selling price of wheat Crips(25000*price as at expiry) | 107500 | 117500 | 127500 | 137500 |

Cost | 111000 | 111000 | 111000 | 111000 |

Profit/loss in cash market | -3500.00 | 6500.00 | 16500.00 | 26500.00 |

Profit/loss in forward contract | 18750 | 8750 | -1250 | -11250 |

Total Profit/loss | 15250.0 | 15250.0 | 15250.0 | 15250.0 |

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