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QUESTION 4 A small soybean grower expects to harvest one hundred thousand bushels in four months. The current cash price for the crop is $4.25
QUESTION 4
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A small soybean grower expects to harvest one hundred thousand bushels in four months. The current cash price for the crop is $4.25 per bushel. The soybean futures contract that matures in four months is currently trading at 425. Each contract is for five thousand bushels. Show all work.
- (5pts) How many futures contracts should the grower trade to hedge the crop price risk?
- (5pts) Which should the grower do sell short or go long?
- (5pts) In four months, the price of soybeans is $5.00 per bushel due to drought, and the futures contract is trading at 500. How much is the gain or loss on the cash crop? On the futures contract?
- (5pts) Is this an effective hedge? Explain.
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