Today - January 27, 2020, a farmer sells 10 wheat futures contracts to a flour mill...
Today - January 27, 2020, a farmer sells 10 wheat
futures contracts to a flour mill at S10 per bushel. Each futures
contract size is 5,000 bushels of wheat. On the settlement date
which is May 10, 2020, assume that the spot price per bushel will
be $9.0. Show the settlement between the farmer and the flour mill
through:
a. Actual delivery, and
b.Cash settlement
Homework Answers
a. In the case of actual delivery, the farmer has to deliver 5,000 * 10 = 50,000 bushels of wheat to the flour mill for $500,000
The spot worth of the actual wheat bushels delivered would be $9 * 50,000 = $450,000
b. In the case of a Cash settlement, the farmer has to receive cash of $500,000(Contract Price) - $450,000(Spot Price) = $50,000 from the Flour Mill.
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