CSEET · Economic and Business Environment · Indian Financial Markets
A farmer expects to harvest wheat in three months and sells wheat futures today at ₹2,400 per quintal. At expiry the spot price is ₹2,200 per quintal and the futures price converges to the spot price. Ignoring costs, what is the gain per quintal on the futures position, and what is the purpose of the transaction?
The farmer gains ₹200 per quintal because he sold futures at ₹2,400 and the price converged to ₹2,200 at expiry. The gain offsets the lower spot price, so the transaction serves as a hedge against a fall in price, not speculation.
- A₹200 gain; hedging against a fall in priceCorrect
- B₹200 loss; hedging against a rise in price
- C₹200 gain; speculating on a rise in price
- D₹2,200 gain; arbitrage between two markets
Explanation
The farmer sold at ₹2,400 and the contract closes at ₹2,200, so the gain is 2,400 - 2,200 = ₹200 per quintal. This offsets the lower price in the spot market, so the purpose is hedging against a price fall. Calling it a loss reverses the sign for a short position.
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