Suppose your firm produces breakfast cereal and needs 65,000 bushels of corn in December for an upcoming promotion. You would like to lock in your costs today because you are concerned that corn prices might go up between now and December. To hedge your risk exposure, you could purchase corn futures contracts today effectively locking in a total settlement price of _____, based on the closing price shown in the table below. Futures:
Corn - 5,000 bu., U.S. cents per bu.
A)$163,800
B)$164,125
C)$174,238
D)$179,400
E)$183,463

Question

Suppose your firm produces breakfast cereal and needs 65,000 bushels of corn in December for an upcoming promotion. You would like to lock in your costs today because you are concerned that corn prices might go up between now and December. To hedge your risk exposure, you could purchase corn futures contracts today effectively locking in a total settlement price of _____, based on the closing price shown in the table below. Futures:
Corn - 5,000 bu., U.S. cents per bu. 
A)$163,800 
B)$164,125 
C)$174,238 
D)$179,400 
E)$183,463

Quizplus · Accepted Answer

Number of contracts needed = 65,000/5,000 = 13 contracts

Suppose Your Firm Produces Breakfast Cereal and Needs 65,000 Bushels