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Suppose you are a wheat farmer. It is September, and you intend to have 50,000bushels of wheat harvested and ready to sell in November. The current spotmarket price is $2.50 per bushel, and the current December futures price of wheatis $2.75 per bushel. Assume that there are no transactions or carrying costs.

Question 1: Should you buy or sell wheat futures? If each wheat futurescontract is for 5,000 bushels, how many contracts will you buy or sell?How much will you spend or receive in buying or selling these futurescontracts? Explain.

Question 2: It is now November, and you sell 50,000 bushels of wheat atthe spot price of $2.60 per bushel. If the December futures price is $2.85per bushel and you settle your position in the futures market, what wasyour gain or loss on your futures market position? Did you completelyhedge your risk from price fluctuations in the wheat market? Provide anumerical and verbal explanation.

Macroeconomics, Economics

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