FRM Part I · FRM Exam Part I · Futures Markets
A corn farmer hedges a harvest by selling futures at 600 cents per bushel when the spot price is 590 cents. When the hedge is lifted, the spot price is 570 cents and the futures price is 585 cents. Ignoring margin financing, what is the effective price per bushel received by the farmer?
The farmer receives 585 cents per bushel. The spot sale brings 570 cents and the short futures gain 15 cents (600 minus 585). Equivalently, the initial futures price of 600 plus the final basis of minus 15 equals 585.
- A585 centsCorrect
- B600 cents
- C570 cents
- D615 cents
Explanation
Futures gain = 600 - 585 = 15 cents. Effective price = spot sold 570 + 15 = 585 cents. Check using the final basis: the effective price equals the initial futures price 600 minus the final basis (570 - 585 = -15), giving 600 - (-15) = 615? Recompute: effective price = F1 + b2 where b2 = S2 - F2 = -15, so 600 - 15 = 585. The 600 option ignores the basis change.
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