Question
Dyna-Grow is a major player in the global sorghum seed industry. The cash flows of this firm are tied solely to the production of this
Dyna-Grow is a major player in the global sorghum seed industry. The cash flows of this firm are tied solely to the production of this product. The firm expects to harvest and sell 1million bushels of sorghum in one month (on the last day of September), and is investigating alternative ways of laying (hedging) off this risk by taking a position in the futures market. Unfortunately, there are no liquid futures contracts on sorghum, and so the firm has to look at related products. Their analysis revealed that sorghum resembles corn, both with regards to its cultivation and in its end uses. Specifically, both products are used either as livestock food or, in a variety of processed foods for humans. Both products require the same warm temperatures and rainfall distribution. As a result, the firm assumed that the demand and price relationships for these two products should be similar. and decides to take a position in corn futures to hedge the uncertainty in sorghum prices
What position (long or short) should Dyna-Grow take in the corn futures market?
What is this type of hedging called, where the asset in the futures market is different from the asset whose price we are trying to hedge?
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