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Business of producing corn for future sale

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Consider a corn producer who is in the business of producing corn for future sale. At the time of 0 (i.e., present time), we have S(0) = $2.35, F(0) = $2.53. The firm is expecting to sell the corn in 2 months, while the delivery date of the futures contract is 3 months away. Assume that the price of corn in two months is unpredictable, but we know that the future price in two months will be 12 cents higher than the spot price of corns in two months (i.e., F(t) = S(t) + $0.12). What would be a good hedging strategy in order to minimize the commodity price risk that the firm faces (by utilizing futures contract), and what would be the net profit from this hedging strategy?

A. At T= 0, the firm sells a futures contract. And at T= t (i.e., in two months from today), the firm offsets the transaction in the futures market and sells the corn in the spot market as planned. The resulting net profit from this hedging strategy is $0.06.

B. At T= 0, the firm sells a futures contract. And at T= t (i.e., in two months from today), the firm offsets the transaction in the futures market and sells the corn in the spot market as planned. The resulting net profit from this hedging strategy is -$0.12.

C. At T= 0, the firm sells a futures contract. And at T= t (i.e., in two months from today), the firm offsets the transaction in the futures market and buys the corn in the spot market as planned. The resulting net profit from this hedging strategy is $0.06.

D. At T= 0, the firm sells a futures contract. And at T= t (i.e., in two months from today), the firm offsets the transaction in the futures market and buys the corn in the spot market as planned. The resulting net profit from this hedging strategy is -$0.12.

E. None of the above.

Reference no: EM132515636

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