QUESTION 4

In May, Farmer Jones is looking at futures prices and considering using a hedge to lock in a price on part of her corn crop. She sees that the December futures contract is trading at $7.40/bushel and she knows that basis in October (when she expects to deliver and sell her corn and lift the hedge) is usually 25 cents under. When Time 2 arrives, the cash price is $6.95/bushel She harvests the corn and lifts the hedge by selling the cash corn and liquidating the futures part of the hedge. Basis at Time 2 turns out to be -27. What is the gain or loss on the futures position at Time 2?

		A loss of 18 cents/bu
		A loss of 45 cents/bu
		A gain of 45 cents/bu
		A gain of 18 cents/bu

QUESTION 5

Options are described as

		a derivative because the value of the option is derived from the value of the futures contract to which it refers
		an obligation to carry out a futures transaction at a specified future date at a specified price
		a risk free investment
		a commodity

QUESTION 6

One reason a farmer might choose to use a hedge instead of a forward contract is

		with the hedge both the basis part and the cash part of the net cash price are already locked in at Time 1
		with the hedge, the farmer can deliver to any elevator at Time 2
		with the hedge, there wont be any chance of margin calls
		with the hedge, there is no basis risk

QUESTION 7

In June, Farmer Jones is looking at futures prices and considering using a hedge to lock in a price on part of his soybean crop. He sees that the November futures contract is trading at $16.20/bushel and he knows that basis in October (when he expects to deliver and sell his beans and lift the hedge) is usually 30 cents under. When he lifts the hedge, the cash price is $14.92, and basis is 12 cents narrower than expected. What is the gain or loss on the futures side of the hedge when the farmer lifts at Time 2?

		a loss of $.98/bu
		a gain of $1.10/bu
		a gain of $.98/bu
		a loss of $1.10/bu