How many contracts will be required

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In addition to your current class load you have been maintaining a 2,000 acre grain farm near North Battleford, Saskatchewan. You expect to deliver 80,000 bushels of wheat to the market this coming September, with an average yield of 40 bushels per acre. In February you comitted to hedging your position at the closing prices shown in the table below, using a futures contract issued by ADM Lloydminster. Normally, you would not consider trucking your grain this far. At 150 km one-way, you will spend close to one full month hauling wheat next winter. The contract looked good though, because ADM was offering a better settlement price than any of the local buyers that you have used in the past.

Problem 1: Assume that the market price turns out to be 702.4 at the time you make your delivery in September. How much income will you receive in total from the hedged delivery of your oats? Wheat contracts are priced in 5,000 bushel volumes, and the price is provided in cents per bushel. How many contracts will be required, to hedge your complete crop? What is the danger of hedging your complete forecasted production? Discuss.

                       Open.              High               Low                Settle
September     711.3.            711.9           709.2            709.9

Reference no: EM132913899

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