The Health Food Corporation anticipates the need to purchase 80,000 bushels of soybeans in six months to use in their products. The current cash price for soybeans is $5.50 a bushel. A six-month futures contract for soybeans can be purchased at $5.53.
a. Explain why Health Food Corporation might need to purchase futures contracts to hedge their position.
b. To completely hedge their exposure, how many contracts will they need to purchase? Soybeans trade in 5,000-bushel contracts.
c. If the cash price of soybeans ends up at $5.75 per bushel after six months, by how much will the actual cost of 80,000 bushels of soybeans have gone up?
d. After the futures contracts are closed out (sold at $5.75 also), what will be the gain on the futures contracts?
e. Considering the answers to parts c and d, what is their net position?