iPad % 1:31 PM 64% 2. On November 1\" a farm family decided how much winter whea
ID: 2818139 • Letter: I
Question
iPad % 1:31 PM 64% 2. On November 1" a farm family decided how much winter wheat they wanted to plant and what they expect to harvest around the middle of June the following year. They also decided to hedge their crop against a potential cash price wheat futures contracts and below are the month and price of each (these are available for the following year): decline. There are three different available months of May: $4.84 per bushel July: $4.95 per bushel September: S5.10 per bushel What month and therefore futures price should be chosen to start the hedge? Is the hedge a long or short hedge? On the day the hedge is initiated the cash price is $4.50 per bushel and the family believes a good profit can be made at that price given their farming practices. In mid-June the following year, the futures price (fill in the month) is $4.77 per bushel. Fill in the table below to compute the effective price per bushel received by the family after the hedge is completed. Date Cash (Spot) Futures November 1st $4.50 June 15th $4.35 Effective Price/Bu close $4.35+SExplanation / Answer
The family should choose September at the price of $5.10 per bushel as that's the highest price amongst the three of them which will help them fetch higher profits. The hedge should be short as they are trying to protect against a price decline.
In mid-june the following year, September's futures price is $4.77 per bushel.
Date Cash(Spot) Futures
Nov 1st $4.50 $5.10
June 15th $4.35 $4.77
Effective price/Bushel @ close $4.35 + $(5.10 - 4.77) = $4.35 + $0.33 = $4.68
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