You, a farmer, anticipate taking 80,000 bushels of soybeans to the market in three months. The current cash price for soybeans is $5.85. The size of the futures contract is 5,000 bushels per contract, and the current three-month futures price is $5.88. If you wanted to hedge one-half of your exposure to a drop in the value of soybeans, how many futures contracts would you buy or sell?

Question

Quizplus · Accepted Answer

To hedge one-half of the exposure to a drop in the value of soybeans, the farmer would need to sell futures contracts to lock in a price.

First, calculate the total number of bushels to be hedged: 80,000 bushels / 2 = 40,000 bushels.

Next, calculate the number of futures contracts needed: 40,000 bushels / 5,000 bushels per contract = 8 contracts.

Since the farmer is selling futures contracts, they would sell 8 contracts at the current three-month futures price of $5.88 to lock in a price and protect against a potential drop in value.

You, a Farmer, Anticipate Taking 80,000 Bushels of Soybeans to the Market