4. A farmer wishes to hedge a sorghum s (also called milo c ) crop. The farmer has regressed the changes in the price of sorghum on the changes in the futures price of corn, wheat and soybeans and found the following RSquared and Correlation values: The farmer expects to produce 12 million pounds of sorghum. Each corn futures contract calls for delivery of 5,000 bushels of corn. The conversion rate for sorghum is 56 pounds per bushel. An examination of past prices of wheat futures and spot sorghum prices shows the following: - The correlation (S,F) between the prices is is 0.95. - The standard deviation of the spot price of sorghum (s) is 0.0184 - The standard deviation of the futures price An examination of past prices of wheat futures and spot sorghum prices shows the following: - The correlation (S,F) between the prices is is 0.95. - The standard deviation of the spot price of sorghum (S) is 0.0184 - The standard deviation of the futures price of wheat (F) is 0.0150 a) Which contract should the farmer use? b) Calculate the optimal number of Corn contracts the farmer should use to hedge the sorghum crop. c) Should the farmer take a long or short positon in corn futures to hedge the sorghum crop? 4. A farmer wishes to hedge a sorghum s (also called milo c ) crop. The farmer has regressed the changes in the price of sorghum on the changes in the futures price of corn, wheat and soybeans and found the following RSquared and Correlation values: The farmer expects to produce 12 million pounds of sorghum. Each corn futures contract calls for delivery of 5,000 bushels of corn. The conversion rate for sorghum is 56 pounds per bushel. An examination of past prices of wheat futures and spot sorghum prices shows the following: - The correlation (S,F) between the prices is is 0.95. - The standard deviation of the spot price of sorghum (s) is 0.0184 - The standard deviation of the futures price An examination of past prices of wheat futures and spot sorghum prices shows the following: - The correlation (S,F) between the prices is is 0.95. - The standard deviation of the spot price of sorghum (S) is 0.0184 - The standard deviation of the futures price of wheat (F) is 0.0150 a) Which contract should the farmer use? b) Calculate the optimal number of Corn contracts the farmer should use to hedge the sorghum crop. c) Should the farmer take a long or short positon in corn futures to hedge the sorghum crop
