In September, a feedlot operator determines that he will need 25,000 bushels of corn to meet his feeding requirements in April. The feedlot operator does not have enough storage to buy the corn before it is needed. On September 30th, the cash forward offer for April is $2.29/bu and the May corn futures are trading at $2.48/bu and the feedlot operator decides to hedge. On April1st, the local cash price is $2.35/bu and May corn futures are trading at $2.45/bu. Use this information to answer questions (a) through (e) below. .
a. If the operator’s decides to hedge, describe his/her actions in the futures market on September 30.
b. What is the number of futures contracts needed to fully hedge his corn requirements assuming one corn futures contract is 5,000 bushels? Show work.
c. Describe his actions on futures market on April 1? Explain.
d. What is the net outcome of the hedge and cash activities combined? Show work.
e. Was the operator better off hedging instead of using a forward contract? Explain.