You expect to deliver 40,000 bushels of wheat to the market in July. Today, you hedge your position by selling futures contracts on half of your expected delivery at the final price of the day. Assume that the market price turns out to be 582.0 when you actually deliver the wheat. How much more or less would you have earned if you had not bought the futures contracts?
Wheat - 5,000 bu.:
u.S. cents per bu.
A)$8,000 less
B)$4,000 less
C)neither more nor less
D)$4,000 more
E)$8,000 more

Question

You expect to deliver 40,000 bushels of wheat to the market in July. Today, you hedge your position by selling futures contracts on half of your expected delivery at the final price of the day. Assume that the market price turns out to be 582.0 when you actually deliver the wheat. How much more or less would you have earned if you had not bought the futures contracts?
Wheat - 5,000 bu.:
u.S. cents per bu. 
A)$8,000 less 
B)$4,000 less 
C)neither more nor less 
D)$4,000 more 
E)$8,000 more

Quizplus · Accepted Answer

Loss on contract = (0.5 F1F1F1S1F1F1F10 40,000) F1F1F1S1F1F1F10 [(582.0F1F1F1S1F1F1F10 - 562.0F1F1F1S1F1F1F10)/100] = $4,000. You would have received $4,000 more if you had not sold the futures contract.

You Expect to Deliver 40,000 Bushels of Wheat to the Market