Question
Jack Straw grows soybeans on a 2,000-acre farm outside Wichita Kansas. It is late May and Jack has just finished planting. His typical yield is
Jack Straw grows soybeans on a 2,000-acre farm outside Wichita Kansas. It is late May and Jack has just finished planting. His typical yield is 100 bushels per acre, so he expects to harvest 200,000 bushels of soybeans in the fall. Soybean futures contracts trade on the CME. The soybeans contract calls for the delivery of 5,000 bushels of soybeans. Assume that Jack enters the appropriate futures position (in the December contract) to hedge his price risk at a futures price of $5.3325/bu. In the fall, Jacks sells his harvest to his local grain elevator, who pays him the prevailing spot price of $4.3325/bu. Simultaneously, Jack executes an offset trade in the futures market. Assume that, due to convergence, the futures price on that date is equal to the spot price. What is Jacks cumulative profit from the futures transaction and what are his proceeds from selling his wheat?
a. What is the Cumulative Profit (in dollars)?
b. What are the proceeds (in dollars)?
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