$9.$ After graduating from NMSU, Liam Oliver takes a position as an agricultural market consultant for a grain

cooperative in Red River, Kansas. The cooperative purchases wheat from local farmers and stores it until they

sell it to large flour mills or other wheat users.

On March $1,$ the cooperative's manager informs Liam that the cooperative has made agreements to sell

$100,000$ bushels of wheat to several regular customers for $$6\mathrm{.}1000$ per bushel in September. They have open

agreements to purchase wheat from local farmers on the spot market during the harvest months of July and

August. Last year, the cooperative purchased new$-$harvest wheat $($wheat harvested in July and August$)$ for five

over September. The cooperative's manager is concerned that the price of new$-$harvest wheat may increase

between March and harvest time, increasing the cooperative's cost of purchasing wheat in July and August

and hence impacting their profit $($they have agreed to sell the wheat at an established price but don't have

agreements on how much they will have to pay farmers, only that they will pay the "going rate" at harvest

time$).$ On March $1,$ cash wheat prices are at $$6\mathrm{.}3350$ per bushel. September futures are trading at $617\text{'}2.$

$($a$)$ What position should the cooperative manager take to hedge the cooperative's wheat purchases?

$($b$)$ Assuming the cooperative uses standard$-$size wheat futures contracts, how many contracts will they need

to fully hedge their upcoming wheat purchase?

$($c$)$ Why might the cooperative consider not fully hedging their upcoming wheat purchase from the farmers?

$($d$)$ What is the cooperative's "expected hedge price" for wheat they will purchase in July and August $($the

final price he will have to pay after considering gains or losses in the futures market$)?$

In July cooperative manager is ready to purchase wheat from local farmers. The new$-$harvest cash wheat price

is now $6\mathrm{.}5500$ per bushel. The September futures contracts, used to hedge the wheat, are trading at $649\text{'}0.$

$($e$)$ What is the realized hedge price $($the cooperative's price for the wheat after accounting for gains or losses

in the futures market$)?$

$($f$)$ Was the cooperative's expected hedge price equal to their realized hedge price? If not, why? Use terms

we have discussed in class.