Suppose today is November 22, 2011, and your firm produces breakfast cereal and

Question

Suppose today is November 22, 2011, and your firm produces breakfast cereal and needs 100,000 bushels of corn in December 2011 for an upcoming promotion. You would like to lock in your costs today because you are concerned that corn prices might rise between now and December. Use Table 25.2

a. What is the total price are you locking in for the 100,000 bushels of corn based on the day's closing price?

b.

Suppose corn prices are $5.98 per pound in December. What is the profit or loss on your futures position?

Please show work.

b.

Suppose corn prices are $5.98 per pound in December. What is the profit or loss on your futures position?

Explanation / Answer

a)The prices are 597.75 cents or $5.9775 per bussels

The contract size = 5000 bussels

Contract amount = 5000*597.75 = 2988750 cents or 29,887.50 dollars

So we need = 100,000/5000 = 20 bussels

So money we are locking is = 29887.50*20 = 597,750$

b) Price as 5.98 in dec

We wil make a profit of = 5.98 - 5.9775 = .0025 per bussels

Sp profit = .0025*100,000 = $250

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