Question 7

An elevator operator typically purchases huge amounts of grain from farmers.

Assume the following prices.

DateSpot Price/BuMarch Futures Price

September1$2.10$2.34

October1$2.05$2.20

November1$2.20$2.38

It costs the elevator $0.05/Bu/month to store the grain.

An elevator purchases grain from a farmer on September 1.He has no immediate buyer, so he puts it into storage and hedges.On November 1 he has a buyer at one cent over the spot price.He thus sells his grain at that price and immediately liquidates his hedge.

What is the elevator's hedging position?

there is no need for the elevator to hedge

the elevator long hedges from September 1 to November 1

the elevator short hedges from September 1 to November 1

the elevator short hedges from September 1 to October 1