You need 70,000 bushels of corn for your production operations next month. The futures contracts on corn are based on 5,000 bushels and are currently quoted at 371.25 cents per bushel for delivery next month. If you want to hedge your cost, you should ________ contracts at a cost of ________ per contract.
A) Buy 12; $2,570
B) Buy 14; $18,562.50
C) Buy 16; $22,570.00
D) Sell 14; $18,562.50
E) Sell 16; $22,570.00

Question

Quizplus · Accepted Answer

To hedge the cost of the needed 70,000 bushels, the company needs to buy futures contracts. The number of contracts needed is calculated by dividing the total bushels needed (70,000) by the bushels per contract (5,000), which equals 14 contracts.

The cost per contract is calculated by multiplying the current futures price (371.25 cents per bushel) by the bushels per contract (5,000), which equals $18,562.50 per contract. Therefore, the company should buy 14 contracts at a cost of $18,562.50 per contract, or a total cost of $259,875.

You Need 70,000 Bushels of Corn for Your Production Operations