1. On May 1 a Kansas farmer entered into a short futures contract to sell 200,000 bushels of wheat for 525 cents per bushel by entering into a futures contract that matures on October 3 (5 points each part)

1. On September 30^th the farmer closed out his contract by taking a long futures position at a price of 450 cents per bushel and sells 200,000 bushels of wheat in the spot market for 450 cents per bushel. Calculate the effective price paid by the farmer (show the gain or loss on the futures contract plus the amount received in the spot market and combine them to get the effective price).
2. Repeat the question for a closing futures price of 600 cents per bushel and a spot price of 600 cents per bushel.
3. Instead of the outcomes in part a) & b), assume the farmer sells her 200,000 bushels of wheat for 440 cents per bushel on Oct 1, and closes out the futures contract at a price of 425 cents per bushel also on Oct 1. Calculate the effective price paid by the farmer.
4. Assume that the farmer has a smaller crop than expected and only sells 170,000 bushels of wheat in the spot market on Oct 1. Repeat part c) (she sells the wheat for 440 cents and closes out the futures for 425 cents) calculate the effective price paid by the farmer and explain the two types of basis risk that impacted your answers in parts c and d.

Please explain, I really need to understand instead of just having the answer!