On June 15, the spot price for corn stands at $5.20 a bushel, while the October

Question

On June 15, the spot price for corn stands at $5.20 a bushel, while the October futures contract for corn stands at $5.32 per bushel.

a. Determine what the basis is for corn on June 15. (– 0.12 )

b. Based upon this basis value, would you expect normal backwardation or contango to occur in the futures market as the October corn futures contract moves toward settlement?

c. The following month (July 10) the spot price for corn goes to $5.25 per bushel, while the October futures contract price moves to $5.10 per bushel.

1.) Determine the basis value for corn on July 10. (0.15 )

2.) Has the basis for corn strengthened or weakened between June 15 and July 10? (Refer above to part a.)

3.) Based upon this new basis value for July 10, would you expect normal backwardation or contango to occur in the futures market as the October corn futures contract moves toward settlement?

Please answer without the use of excel. The answers for the math questions are in the parenthesis just need the working on how to do it.

Explanation / Answer

a. Basis on June 15th is = Spot price - Futures price = 5.20 - 5.32 = -0.12

b. Since the basis value is negative and the futures price is higher than the stock price, you would expect Contango to occur in the futures market

c1 The basis on July 10th is = Spot price - Futures price = 5.25 - 5.10 = +0.15

c2. Since the basis gained in value from -0.12 to +0.15, we can say that the basis strengthened

c3.  Since the basis value is positive and the futures price is lower than the stock price, you would expect normal backwardation to occur in the futures market

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