HEDGING WITH DERIVATIVES

You are a grain merchant with an inventory of 2,000,000 bushels of soybeans to sell in the coming months. The price of corn is high now at $11.70/bushel but there is a risk that the price may decline as we move into harvest season.

The derivatives market you decide to use to hedge is the May 2021 Soybean Futures market; its price now is $11.75/bushel. The notional amount of one futures contract is 5,000 bushels.

a. Do you buy the futures contract or sell the futures contract as a hedge?

b. How many futures contracts do you buy or sell?

c. Two months later you sell all the soybeans to a feed manufacturer and offset your futures hedge.

The price at which you sell the soybeans is $12.50/bushel. How much money in total do you receive for the sale?

The price of the May 2021 soybean futures at that time is 12.60/bushel. Has your hedge made a profit or a loss? How much?

d. When you combine the amount you received for the soybeans and the profit or loss on the futures market hedge, what is the net amount of you have received (i.e. your "effective value")?

e. Convert that effective value into the "effective price" per bushel of soybeans.