You are a farmer, and you grow corn. It is now February, and as you plan for the next growing season, you estimate that you will have 100,000 bushels of corn to sell next fall and that your cost of seed, fertilizer, and equipment will be $5.04 per bushel. You note that the current price of a futures contract for corn for December delivery is $6.35 per bushel. Each contract is for 5,000 bushels of corn. (You may ignore margins and transactions costs.)

a) Describe what you would do right now if you wanted to lock in the December price using futures contracts.

b) Assume that you entered into the contracts you recommended in part a). If the spot price of corn in December is $6.42 per bushel, describe the process you would go through to close out your futures position and sell your corn. How much money would you have after all is said and done?

c) You have decided that you want to take a chance that the price of corn will go up, but you do not want to lose the farm if you are wrong. So you have decided to hedge enough of your production to cover your expenses. Describe the types and numbers of contracts you would deal in. Would you be a buyer or seller?

d) Assume you entered into the contracts described in part c) and that the price of corn rose to $6.51 per bushel by December. How much money will you have made on your crop once all contracts are settled?