Question

1. A farmer enters into a short corn futures contract at a price of $2.80 per bushel. The spot price of corn drops to $2.65 when the contract expires. The farmer harvested 13,000 bushels of corn and had futures contracts on only 10,000 bushels of corn.
   1. The farmer is obligated to ___ (receive/deliver) the corn when the contract expires.
   2. What is the farmer’s total net proceeds if he sold all his corn harvest at the contract’s expiration?  

Answer 1

Forward contract is a derivative contract to hedge the change in price of the asset owned by the hedger. In this case, farmer owns the bushels, he wants to hedge his selling price so that if the actual price falls, he can still get the contracted price.

a) The farmer is short on the forward contract. This means he has contracted to sell the underlying. The underlying is the corn bushels. So the farmer is obligated to deliver the corn bushels

b) The bushels which are hedged by the forward contract will be sold for $2.80 per bushel but those which are not hedged will be sold for $2.65 per bushel only. SO the net proceeds will be

10000 x 2.80 + 3000 x 2.65 = $35950