Asked by chikatimalla bhargavi on Jun 27, 2024
Verified
A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn.
Ignoring the transaction costs, how much did the farmer improve his cash flow by hedging sales with the futures contracts?
A) $0
B) $2,000
C) $31,875
D) $33,875
Futures Contracts
Standardized legal agreements to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future.
Spot Price
The present selling price of a specific asset, such as a commodity, currency, or security, available for instant purchase or sale.
Cash Flow
The total amount of money being transferred into and out of a business, affecting its liquidity, operations, and financial health.
- Acquire knowledge on the concept and application of hedging via futures contracts and its influence on financial conditions.
Verified Answer
SB
Learning Objectives
- Acquire knowledge on the concept and application of hedging via futures contracts and its influence on financial conditions.