Question

In May, Green Grains Inc. placed a long futures positions to hedge against a possible increase in the price of wheat, a key raw material in the production of flour. Based on the selling price that Green Grains earns from its customers, the maximum price that it can pay for wheat is $7.50 per bushel to break even. You also have the following information and assumptions: (1) The current spot price of wheat is $5.63 per bushel, and the September futures price of the commodity is $6.38 per bushel. (2) At $6.38 per bushel, the company will easily break even and make some profit, so it wants to lock in this purchase price for delivery in September. (3) Wheat futures contracts trade in a standard size of 5,000 bushels. To meet its production requirements, Green Grains buys 20 future contracts.  In September, the spot price of wheat rose to $9.00 per bushel, and the price of wheat futures rose to $9.60 per bushel.  Based on your understanding of the long hedge strategy, the net gain or loss in the cash market is ______.

Answer 1

We see that profit in cash market is given as=(5.63-9.00)*20*5000
=-337000

Loss of 337000