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In October, Rye Company, a producer of a grain - based product, determined that it would need 1 0 , 0 0 0 bushels of
In October, Rye Company, a producer of a grainbased product, determined that it would need bushels of grain near the end of February of the following year. Rye Company expects the current price of $ per bushel of grain to change and does not want to assume the risk of such market price changes. As a result, Rye Company enters into a futures contract with Chicago Clearing House Inc. CCH to hedge the risk of market price changes of grain. The cost of the cash ow hedge futures contract is zero. The futures contract provides that Rye Company purchases the grain at the date needed at market price, but CCH must pay Rye Company any dierences above $bushel while Rye Company pays to CCH any dierences below $bushel Assume that the market price of grain is $bushel on December and that Rye Company settles the futures contract with CCH and purchases the bushels on February of the following year in the market for $bushel
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