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FRM Part I · FRM Exam Part I · Using Futures for Hedging

A farmer will sell 50,000 bushels of corn in two months. The current spot price is USD 5.20 per bushel. She shorts December futures at USD 5.40 per bushel. Two months later she sells in the spot market at USD 4.90 and closes the futures at USD 5.00. Ignoring margin financing costs, what is her effective net price per bushel?

The effective price is USD 5.30 per bushel. She sells the corn at 4.90 and earns 0.40 on the short futures (5.40 minus 5.00). Equivalently, the initial futures price of 5.40 plus the final basis of -0.10 gives 5.30.

  1. AUSD 5.30Correct
  2. BUSD 4.90
  3. CUSD 5.00
  4. DUSD 5.20

Explanation

Futures gain per bushel = 5.40 - 5.00 = 0.40. Net price = 4.90 + 0.40 = 5.30. Equivalently, initial futures price 5.40 plus final basis (4.90 - 5.00 = -0.10) = 5.30. Using the initial spot of 5.20 ignores the basis change.

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