You anticipate your firm will need 20,000 bushels of oats in December so you hedged your position today at the closing price when the daily price quotes were: Open 222, High 225.50, Low 223.50, and Settle 218.50. Assume the actual market quote turns out to be 228.70 on the day you actually acquire the oats. Oats futures contracts are based on 5,000 bushels and priced in cents per bushel. What was your gain or loss from hedging your position?

Question

Quizplus · Accepted Answer

The gain from hedging can be calculated by finding the difference between the hedged price and the actual market price at the time of acquisition, then multiplying by the total number of bushels. The hedged price was 218.50 cents per bushel, and the actual price was 228.70 cents per bushel. The difference is 10.20 cents per bushel. For 20,000 bushels, the total gain is 20,000 bushels * 10.20 cents = 204,000 cents, or $2,040.

You Anticipate Your Firm Will Need 20,000 Bushels of Oats