Question
In April, a spring wheat farmer is planning to plant 100,000 bushels of wheat, which will be ready for harvesting and delivery in September. Contract
In April, a spring wheat farmer is planning to plant 100,000 bushels of wheat, which will be ready for harvesting and delivery in September. Contract Size 5,000 bushels Initial Margin USD $2,250 Assume that: The farmer knows from past years that the total cost of planting and harvesting the crop is about $6.30 per bushel. In April, September wheat futures (the time of harvest) are trading at $6.70 per bushel and the wheat farmer wishes to lock in at this price. Required: a. Should the farmer go long or short the futures contract? b. How many contracts does the farmer need to buy or sell to hedge the position? C. Compute the gain or loss for the farmer based on the assumption that the price (of wheat) has fallen: 1. Local elevator price is $6.20 per bushel (i.e. the price at which the farmer sells the bushels to the buyer/local elevator). 2. Wheat futures price is now $6.41 per bushel (i.e. the hedge). d Compute the return on investment with regard to one (1) futures contract.?????
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