1 Problem: How to sell this year's soybean crop. It's November, the crop is safely in the bin, and you don't need the money until March. Strategies: 1. Store until March and sell for whatever the cash price is then. 2. Forward cash contract for March delivery, at $10.20 per bushel 3. Hedge by selling a March futures contract at $10.75. Buy back the contract in March, and then sell the soybeans for cash. Strategy 1. Store and sell in March at cash price 2.Forward contract and deliver in March 3.Sell futures contract, buy it back in March, sell beans for cash price (gain or loss on futures, plus cash price) Scenario 1: Prices fall, basis widens March futures price = $9.51 Basis= $.80 March cash price = $_ Net price = S Net price=S_ Gain/loss on futures - S Cash price Net price Results in March = Which strategy has the highest net price? Which strategy has the lowest net price? Which strategy is most risky? Strategy 1,2, or 3 Which strategy is least risky? Strategy 1,2, or 3 Scenario 1: Scenario 1: Scenario 2: Prices rise, basis narrows March futures price = $12.42 Basis- $.40 March cash price=S Net price-S Net price=S Gain/loss on futures=S Cash price Net price= Scenario 2: Scenario 2: (widest range of results) (narrowest range of results)