Question
THE CORN AND HOGS CASE - Hedging his bets By planting time, the package-tampering panic had subsided, corn prices returned to more normal levels, and
THE CORN AND HOGS CASE - "Hedging his bets" By planting time, the package-tampering panic had subsided, corn prices returned to more normal levels, and Plowright again decided to plant enough seed to grow another 10,000 bushels of corn. However, sobered by the experi-ence, he decided not to subject himself so completely to the ups and downs of the open market. Thus, in late April Plowright sold futures contracts to Trader Rick for September 30 delivery of half of his entire crop at $4.50 per bushel. He spent $23,000 for seed, fertilizer, and the like as in the preceding year and completed planting in early May.
After harvesting the 10,000 bushels in Sep-tember, he delivered 5,000 bushels on September 30 to Trader Rick as promised and collected cash of $22,500. He also sold the remainder of his crop on that date as well at the prevailing market price of $5.00 per bushel. a. If Plowright's year-end is September 30, what profit should he recognize from his farming and hedging activities between April 1 and September 30?
b. What if, after entering into the futures contracts, Plowright decided to grow soybeans instead of corn because he anticipated an upsurge in soybean prices. How should he account for the $2,500 ($.50 5,000 bu.) he would have to pay Trader Rick to settle the corn futures contracts?
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