Suppose today is May 1, 2019, and your firm produces breakfast cereal and needs 400,000 bushels...

Suppose today is May 1, 2019, and your firm produces breakfast cereal and needs 400,000 bushels of corn in July 2019 for an upcoming promotion. You would like to lock in your costs today because you are concerned that corn prices might rise between now and July. Each contract is for 5,000 bushels; the settle price for July 2019 is $5.18 per bushel.

Suppose corn prices are $5.14 per bushel in July 2019. What will your cumulative mark to market be? (Do not round intermediate calculations. Enter your answer as a positive value if a profit or as a negative number if a loss. Round to the nearest whole number, i.e. dollar, e.g., 32.).

Cumulative MTM = $_______

Expert Solution

Number of contract = 400,000 / 5,000

= 80

Number of contract is 80.

Total cost effectively locked = $5.18 × 400,000

= $2072,000

Total cost effectively locked today is $2072,000.

Cumulative mark to market = ($5.14 - $5.18) × 400,000

= -$0.04 × 400,000

= - $16,000

Cumulative mark to market - $16,000. Since Cumulative mark to market is negative value so investor incur loss in futures contract.

jeff jeffy answered 6 months ago

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