Hedging Math

Scenario #1

You are a corn producer. Today, May 1, you have planted corn and you expect a crop of over 20,000 bushels. You would like to sell the crop soon after the October harvest. You are fairly certain that prices are heading down, so you want to lock in a price for December delivery. The performance bond deposit of $700.00 per contract and possible performance bond calls will not cause you a cash-flow problem. You decide to sell four December corn futures contracts (5,000 bushels each, or 20,000 bushels).

The December futures price today is $4.00 and the local forward cash for December is $3.60. Brokerage fees for each contract is $50.00 round-trip.

In December, futures prices have fallen to $3.80 and cash prices to $3.50.

Date	Cash Market	Futures Market	Basis
May
December
Results

1. In May do you take a long or short position in the futures market?
2. In December, what do you do in the futures market? Cash market?
3. What is the revenue from the cash market?
4. Was there a gain or loss in the futures market?
5. What was the net profit/loss in the futures market (dont forget the brokerage fees)
6. What happened to basis?
7. Was this a scenario a long hedge or a short hedge? Why?
8. What was the net price received per bushel for this scenario?