What is the gain or loss on a one contract hedge combined

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A food company buys large amounts of corn for manufacturing, but also sells some of the corn to other food manufacturers. This year the company is afraid prices will drop on corn when it is time to sell corn to other companies. The current price on February 1 for selling corn is $17 per bushel, and that is the price they want to receive for their future sales on July 1. They plan on selling 5,000 bushels, which is also the amount of one corn futures contract. The July corn futures current price on February 1 is $19, and it is anticipated that the future spot price of corn on July 1 will be $15, with the futures contract price on that date at $17. Margins are 6%, and broker loans are at an 8% interest rate.

Problem 1: What is the gain or loss on a 1 contract hedge combined with the proposed company sale, at the prices assumed for July 1?

Reference no: EM132945646

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