Question
On May 1, after planting you are planning to sell 100,000 bushels of corn in December. To protect against falling price from now to harvest,
On May 1, after planting you are planning to sell 100,000 bushels of corn in December. To protect against falling price from now to harvest, you place a short hedge using the DEC futures contract at the price in the table below. As expiration of the December contract approaches you must decide if you will sell, as was your original intention, or if you will roll your hedge forward and sell in March instead.
Compare the net selling prices in December verses rolling the hedge forward to March.
(1) Calcualte the net selling price in December. Cash selling price in the spot market: _____________ Gain (loss) from short hedge: ___________________ Net selling price: ____________________________
(2) Calculate the net selling price if you roll the hedge forward and sell in March. Cash selling price in the spot market: _____________ Gain (loss) from the short hedge(s): ______________ Net selling price: ____________________________
(3) If the storage cost is $0.15/month/bu, which option is more profitable?
Date May 1 December 1 March 1 Spot price 5.50 5.80 6.25 Price of DECFutures Price of MLAR Futures 5.85 6.10 5.82 6.20 6.15Step by Step Solution
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