A farmer who has planted soybeans for November harvest estimates that in order t

Question

A farmer who has planted soybeans for November harvest estimates that in order to make a profit, he will have to sell his soybeans for $5.48/bushel. In May, cash soybeans are $5.48/bu and the November futures price is $5.76/bu. The farmer hedges his position in the futures market. By November, the cash price has declined to $4.83/bu and the November futures price is $5.10/bu. The farmer lifts his hedge and sells his soybeans at the prevailing price.

a. Is this a short or long hedge? Explain. (5 points)

b. Calculate the basis in May. Show your work (3 points)

c. What is the basis in November? Show your work (3 points)

d. Did the basis strengthen or weaken? Explain (5 points)

e. What is the gain or loss in the futures market? Show your work (5 points)

f. What was the net price received for his soybeans after hedging? Show your

work (6 points)

Explanation / Answer

a it is a short hedge as the futures will have to be shorted to avoid any type of loss in prices from the futures price of november 5.76/bu. As the shorted future will give profit if the prices were to reduced. But the rate is locked at the price of the shorted futures and no further gain beyond that can be made. b Basis points spot - futures price Basis points in May Spot Price 5.48 a november Futures 5.76 b Basis -0.28 a-b c Basis in November Spot Price 4.83 a november Futures 5.10 b Basis -0.27 a-b d As the basis points have moved from -0.28 to -0.27 we can say that the basis has strengthened.

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