Problem
Suppose today is February 12, 2022, and your firm produces breakfast cereal and needs 140,000 bushels of corn in May 2022 for an upcoming promotion. You would like to lock in your costs today because you are concerned that corn prices might go up between now and May. Note that each corn futures contract is for 5,000 bushels.
1. To hedge your risk exposure, should you hold a long position or a short position in the futures contracts?
2. How many contracts do you need?
3. What price would you effectively be locking in? Suppose that May corn futures contract price is currently at $3.825 per bushel.
4. Suppose corn prices are $4.09 per bushel in May. What is the profit or loss on your futures position?