Question

15. The reason that hedging with futures works is that the cash price tends to be less/more variable than the basis. Suppose you plan to buy corn in the cash market in November and store it to sell in June. the November casa price is $3.40 (all prices are per bushel) the June 1 cash turns out to be $3.50. The July futures is selling for 33.80 on November 1, while its price on June 1st is $3.60. Please show your calculations for the next 100 questions. 16. What would the return be if only the cash market is used? 17. What would the return be if a carrying-charge hedge were used? 18. What are the beginning and ending bases? 19. Did the basis widen or narrow? By how much? 20. You produce corn, if when you plant in May you short hedge your corn with December futures, the hedge price you receive is made up of what two factors and when do you know them? 21. Because of the potential to deliver on futures contracts, the cash and futures prices tend to converge in the delivery month. What forces usually cause this to happen? 77 If there is an expected return to storage, how would you expect the futures prices for March, May, and July

Answer 1

Answer:

16. If only the cash market is used then Return would be = $ 3.50 - $ 3.40 = $ 0.10 per bushel

17. If Carrying - charge hedge were used then the return would be = $ 3.60 - $ 3.40 = $ 0.20 per bushel

18. The beginning base is Cash price at beginning of period november 1st $ 3.40

The end base is the selling price as per cash market or futures market as the case may be i. e $ 3.50 or $ 3.60 respectively

19. The basis can be widened by selling it in futures market on july instead of june.

It can be widened by selling $ 3.80 per bushes in july than in june at $ 3.60 in futures market i.e base widened by $ 0.20 per bushes

20. If we produce corn , if when plant in May we short hedge with corn in December futures, the hedge price we receive is made up of following two factors:

1. Demand of corn in the market

2. Supply of corn in the market

21. Because of the potential deliver to future contracts, cash and future prices tend to coverage in delivery month. The forces usually to cause this to happen be demand and supply in the market and cash flow in the market.

22. If there is expected return to storage, then future prices for march, may , july 2018 would be Higher than the current level of prices in the future.

23. Two hedging futures disadvantages with producer :

1. If price falls down in the future market then profit will be lower

2. If demand of the product falls down then it directly affects the price adversely and the profit will be fallan

24. A processor hedge is a Long Hedge.

25. If a producer hedges corn at planting his/her price will be the futures price at Maturity/ Cutting plants minus the ending basis.