You expect to deliver 60,000 bushels of wheat to the market in September. Today,

Question

You expect to deliver 60,000 bushels of wheat to the market in September. Today, you hedge your position by selling futures contracts on half of your expected delivery at the final price of the day. Assume that the market price turns out to be 495.5 at the time you make your delivery in September. How much more or less would you have earned if you had not bought the futures contracts? (Each contract is for 5,000 bushels)

Open

High

Low

Settle

Sep

491.0

492.5

486.0

487.5

Open

High

Low

Settle

Sep

491.0

492.5

486.0

487.5

Explanation / Answer

Number of contracts to be bought = 30,000/5,000 = 6

Selling price of futures contracts = $487.5

Loss per contract at expiry = $487.5 - $495.5 = -$8

Total loss = $8 x 6 = $48

So, if you had not hedged the position, you would have earned more $40.

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