HEDGING. Farmer Jim Beam is trying to decide whether to plant wheat this spring. It costs farmer Jim about $3.03 to grow a bushel of wheat. He estimates that his total crop will be 60,000 bushels and will be ready to sell in September. September wheat is trading in the futures market at 343.50 cents per bushel. Jim decides to hedge his crop.
a. What transaction will he make in the futures?
In September wheat is trading at 312.25 cents per bushel. Jim offsets his futures position and at the same time sells his wheat in the cash market. Assume that cash and futures prices are the same and that Jim pays no commissions.
b. What is Jim's total profit or loss?
c. What is his profit or loss in the cash market?
d. What is his profit or loss in the futures market?
e. What would his profit or loss have been if he didn't use the Futures Market?