Suppose today is March 29, 2011, and your firm produces breakfast cereal and nee

Question

Suppose today is March 29, 2011, and your firm produces breakfast cereal and needs 130,000 bushels of corn in December 2011 for an upcoming promotion. You would like to lock in your costs today because you are concerned that corn prices might rise between now and December. Use Table 23.1 a. What total cost would you effectively be locking in based on the closing price of the day? Total cost $ b. Suppose corn prices are $5.83 per pound in December. What is the profit or loss on your futures position? (Input the amount as positive value.) $

Explanation / Answer

Dec contract price=6.0025 dollars per bushel

Contract size=5000

to hedge 130000 bushel of corn contract required=130000/5000=26

total cost=26*5000*6.0025=780325

if the corn price fall to $5.83/ bushel in dec (assuming the pound written in question is a typo) my company will incur loss

Loss=(6.0025-5.83)*26*5000=22425

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