1. A local farmer is wanting to use futures contracts to lock the current price being offered on August 15th. The futures price on August 15^th was $15.40 and the local cash price was $14.50. Today the local cash price for a January futures contract is 14.40 while the cash price is $13.50.

a. To hedge against price risk does the farmer do on August 15? Go long or short in the futures market?

b. What happens in the cash market over the time from August to today?

c. What happens in the futures market over that same time period?

d. Was the farmer able to achieve their goal of the hedge which was to lock in the local cash price on August 15.

Using the T account below, demonstrate the mechanics of the hedge above and show the net results

Cash Futures

August 15

December 4