Question

20) (10p) Suppose it is October 2019. Producer plans to sell wheat in early June 2020. Currently the July 2020 wheat futures is trading at $6.20. The expected basis is -SO.10. Fill out the blanks below. October 1, 2019 a) Action: To hedge the producer will b) Expected price: $ July 2020 wheat futures at $6.20/bu June 1, 2020: Actions: c) Cash market: d) To offset: wheat locally at $5.65/bu July 20 futures at $5.70/bu e) Actual basis is $ 1) Therefore actual basis is _than expected g) The hedge resulted in a realized price of $

Answer 1

a) To hedge, the producer will short (sell) the futures

b) Expected price= Futures price + expected basis

= 6.2+ (-0.1)= $6.1

c) Sell wheat locally

d) Buy July'20 Futures

( As he was already having a short position in futures so this buying action will actually close the position in futures)

e) The basis is the difference in spot price & futures price

So actual basis= 5.65-5.7 = -0.05

(NOTE: Although the above convention is most common for basis, at some places basis is also defined in the opposite way: as the difference of future price- spot price, so please check it as per your course material)

f) Actual basis is larger than expected (considering negative sign)

g) realized price = Spot price + basis + gain from futures position

= 5.65 - 0.05 + (6.2-5.7)

=$6.1