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Farmer Tom Hedges anticipates taking 100,000 bushels of oats to the market in three months. The current cash price for oats is $2.15. He can sell a three- month futures contract for oats at $2.20. He decides to sell 10 5,000-bushel futures contracts at that price. Assume that in three months when Farmer Hedges takes the oats to market and also closes out the futures contracts (buys them back), the price of oats has tumbled to $2.03

a.What is his total loss in value over the three months on the actual oats he produced and took to market?

b.How much did his hedge in the futures market generate in gains?

c.What is the overall net loss considering the answer in part a and the partial
hedge in part b

  • Finance - loss=($2.15-$2.03)*100000=$12000
    c.overall net loss=$12000-$8500=$3500

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