Suppose that a farmer, who will have actual corn to sell in three months, sells

Question

Suppose that a farmer, who will have actual corn to sell in three months, sells today a corn futures contract for $.60 per contract. Three months later (just before the delivery date) she covers her position (that is, buys the same contract back) at $.55. During that time the actual (spot) corn price has fallen from $.58 to $.54 per bushel. Which of the following statements is incorrect?

A. The farmer realizes a $.04 gain per unit from her long spot position.

B. The farmer realizes a $.05 gain per unit from her short futures position.

C. Overall, the farmer realizes a net gain of $.01 per unit.

D. This is a typical example of a short hedge using futures contracts.

Explanation / Answer

Option A is incorrect

Long spot position = new price - old price = 0.54 - 0.58 = -0.04 (it is loss)

Short future position = 0.60 - 0.55 = 0.05 gain

Total gain = 0.05 - 0.04 = 0.01

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