Question
A Wheat farmer expects to harvest 60,000 bushels of wheat in September. In order to pay for seed and equipment the farmer had to withdraw
A Wheat farmer expects to harvest 60,000 bushels of wheat in September. In order to pay for seed and equipment the farmer had to withdraw $150,000 from his savings account on January 1 of this Year. He earns 4.8% interest on the savings account and interest on the account accrues monthly in arrears. The Farmer is worried about fluctuations in the wheat price and wishes to hedge the position. Wheat futures are currently quoted as follows:
*****The Prices quoted are in cents per bushel and wheat futures contracts are 5000 bushels.
Month | Forward Price |
September | 341 cents/bushel |
December | 351.5 cents/bushel |
a. What is the effective price he receives for the wheat if there is basis risk? The December Futures prices is 348 in September? (there is no missing info. This is the question)
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