Hedging with Futures Refer to Table 25.2 in the text to answer this question. Suppose today is
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Hedging with Futures Refer to Table 25.2 in the text to answer this question. Suppose today is March 7, 2006, and your fi rm produces breakfast cereal and needs 75,000 bushels of corn in May 2006 for an upcoming promotion. You would like to lock in your costs today because you are concerned that corn prices might go up between now and May.
a. How could you use corn futures contracts to hedge your risk exposure? What price would you effectively be locking in based on the closing price of the day?
b. Suppose corn prices are $2.46 per bushel in May. What is the profi t or loss on your futures position? Explain how your futures position has eliminated your exposure to price risk in the corn market.
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