1. A simple price relationship about sell immediately or hedge and store decision Date Cash Futures 1-Oct Cash Price $2.40 May Futures $2.85 Cost of holding from Oct 1 to May 1 (including interest) = $0.21 1-Oct Sell May Futures @ $2.85 1-May Sell Cash @ $2.50 Buy May Futures @ $2.65 (A) What is the opening basis? 32.40-57.85 = $-.45 2.50 - () What is the closing basis? = 2.65- 15 (C) What decision will you make hedge and store or sell immediately? Why? He Acond Price is to the (c) What is the price if the producer sells immidiately? .99 (D) What is the realized price if the producer hedges and storeste 37.70 What is the overall profitless 101.203.30 2. Hedge and store decision (Assume there is no basis risk): me there is no basis risk) a) Opening and closing basis approach Date Cash Futures 1-Oct Cash Price $2.30 May Futures $2.75 Cost of holding from Oct 1 to May 1 (including interest) = $0.21 Expected Closing Basis = -$0.15 (A) What is the expected profit margin? = $2.75 ? 1-May 1-Oct Sell May Futures @ Sell Cash @ $2.40 Buy May Futures @ (B) What is futures price on May 1st? = (C) What is the gain or loss on futures market result? (D) What is the gain or loss on cash market result? - (E) What is the realized price (or net selling price)? = (F) What is the overall profit? =