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FRM Part I · FRM Exam Part I · Commodity Forwards and Futures

A wheat farmer expects to harvest 50,000 bushels and sells wheat futures at USD 6.00 per bushel to hedge. At harvest, the farmer sells the physical wheat at spot USD 5.40 and closes the futures at USD 5.45. What is the farmer's effective net price per bushel, ignoring margin financing?

The effective price is USD 5.95 per bushel. The short futures gain 0.55 (6.00 minus 5.45), which is added to the spot sale of 5.40. The hedge is not perfect at 6.00 because the basis moved, leaving the farmer with a 0.05 shortfall from basis risk.

  1. AUSD 5.40
  2. BUSD 5.95Correct
  3. CUSD 6.00
  4. DUSD 5.45

Explanation

Futures gain per bushel on the short position is 6.00 - 5.45 = 0.55. Add this to the spot sale of 5.40 to get 5.95. The result differs from 6.00 because of basis risk: the spot minus futures basis is -0.05 at close.

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