George Q. Farmer grows soybeans. He estimates his October harvest at 55,000 bushels. The spot price of soybeans is currently $9.23/bushel. Soybean futures are defined as 5,000bu, $0.01/bu. November soybeans are quoted at 922. To fully hedge his position George should
Buy / Sell ?
How many contracts?
The basis is $ ?
A textbook Hedge will lock in an effective price of $ ?
The farmer estimates that his crop will be 55000 bushels . As the farmer is long on the asset in future, to hedge his position, he has to short i.e. SELL soyabean futures,
The no. of contracts = size of crop/size of one futures contract = 55000/5000 = 11 ontracts
Basis is defined as Basis= Spot price -Futures price
Now, Futures price = 922 (in $0.01/bushel)
=$9.22/bushel
Therefore, Basis = $9.23 -$9.22
=$ 0.01/bushel
For one contract, the basis is $0.01/bushel * 5000 bushel = $50
The total Basis for the entire 11 contracts is 55000 bushel *$0.01/bushel = $550
A textbook hedge will effectively lock in today's future price i.e. $9.22/bushel
George Q. Farmer grows soybeans. He estimates his October harvest at 55,000 bushels. The spot price...
Suppose that you will need to purchase 25,000 bushels of Soybeans in March. The current spot price for Soybeans is 909 cents per bushel and the futures price for the March contract is 922 cents per bushel. What position do you take in the March futures contract to hedge this purchase? (specify long or short and the number of contracts) In the question above what price per bushel have you effectively locked in for the purchase of the Soybeans?
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