It is September 10 and Mr. James is making final estimates of this year’s wheat crop. His production is turning out to be much better than anticipated. This causes concern because if his production is better than expected, other farmers must be experiencing the same situation. The current spot price is $2.25 per bushel, and the October wheat futures (5,000 bushels per contract) price is $2.52 per bushel. At the current spot price, Mr James would just break even with his anticipated 60,000 bushels. His wheat will not be ready until October.
a) What can Mr James do to ensure his profitability? Is this a long or a short hedge? Why?
Introduction:
Hedging is an investment strategy that is used with a view to reduce the risks of price movements of a particular asset or security. One of the common ways of hedging is using derivatives. All types of options & forwards also help the investors to hedge their investments.
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