You expect to deliver 60,000 bushels of wheat to the market in September. Today, you hedge your position by selling futures contracts on half of your expected delivery at the ﬁnal price of the day.
Assume that the market price turns out to be 495´5 at the time you make your delivery in
September. How much more or less would you have earned if you had not bought the futures
Contracts?
Wheat - 5,000 bu.: cents per bu.

Question

Quizplus · Accepted Answer

Since the farmer hedges half of the expected delivery, they sell 30,000 bushels of wheat futures contracts.

If the market price in September is 495.5 cents per bushel, the farmer would have earned:

495.5 cents/bushel x 30,000 bushels = $148,650

If the farmer had not bought the futures contracts and sold the wheat at the market price, they would have earned:

495.5 cents/bushel x 60,000 bushels = $297,300

Therefore, the difference in earnings is:

$297,300 - $148,650 = $148,650

But since the farmer only hedged half of the expected delivery, they would have earned an additional:

$148,650/2 = $74,325

So the net difference in earnings is:

$148,650 - $74,325 = $74,325

Since the farmer would have earned more by not hedging, the answer is D) $2,400 more.

You Expect to Deliver 60,000 Bushels of Wheat to the Market