Reference no: EM133092391
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Let us assume that it is July 23, 2021, and you run a feedlot operation (VanderWal Farms) in Volga, SD. Assume your feed inventory is adequate until February 1, 2022. At that time, you estimate that you will need purchase 15,000 bushels of corn in the cash market to feed your expected inventory of cattle after February 1st. You are worried about rising corn prices and you decide to implement a hedge using Futures Contracts for corn. To analyze this hedging problem, you will need the gather commodity market information and this information will provide your answers to the questions below.
Questions to be answered:
Are you placing a long or short hedge?
Which contract month should you select for setting your hedge?
How many contracts should your purchase to protect against an unexpected increase in the price of corn in February?
What is futures market price of corn (at the close) for the contract month your selected when you set your hedge on July 23, 2021?
If the historical cash basis for corn in February 2022 is 50 cents under, what is your expected cash price per bushel of corn in February when you set your hedge in July?
You purchase 15,000 bushels of corn in early February. The nearby futures price is $7.01 per bushel and the local cash basis is 60 cents under. How much did you pay in the cash market for corn?
Your next step is to close out your futures position. What must you do?
What is the financial (per bushel) outcome of closing out your futures market position?
What is the final price per bushel of corn you paid in February when you include both you cash market and futures market transactions?
Is the actual final price per bushel you paid equal to the price your expected to pay back on July 23rd? (Yes or No) Justify your answer!
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