In early May, a wheat exporter is asked to quote a price on a cargo of 50,000 bushels of wheat to be shipped to an overseas customer in mid-September. The exporter calculates that she can make a profit if she can buy the wheat for $7.15/bu or less. The wheat exporter quotes the customer a price of $7.35/bu f.o.b. port (f.o.b. free on board, i.e., loaded on the ship). One CME wheat futures contract is 5,000 bushels. On May 4th

i. The local cash price is $7.15/bu.

ii. September wheat futures are trading at $7.00/bu

iii. The average historical basis at her location in late August is $0.05/bu over the September futures.

a. Give two reasons why the elevator manager should hedge hercash position.

b. How many futures contracts are needed to hedge 100 percent of her position?