Question 1. A farmer anticipates having 50,000 bushels of wheat ready for harvest in September. What would be the implications of hedging by (a) selling 8 contracts (b) selling 10 contracts, and (c) selling 12 contracts of September wheat?
Question 2. A soybean processor intends to acquire 350,000 bushels of beans in July, process them into meal and oil, and sell these products in August. Conversion ratios are as follows:
1 bushel beans = 50 lb meal
9 lb oil
1 lb water
Put on a crush indicating the profit margin and the number of contracts to buy and sell. Prices are as follows:
July beans = $5.9275/bushel
August oil = $0.2121/lb
August meal = $247.80/ton
Question 3. What is basis? Explain the difference between “normal backwardation” and “contango.”
Question 4. What is the meaning of “marked-to-market”? What is the difference between open interest and volume of trade?