Question

In March, a soybean farmer is planning to plant 100,000 bushels of soybeans, which will be ready for harvesting and delivery in September.

Contract Size              Initial Margin

5,000 bushels              USD $4,375

Assume that:

1. The farmer knows from past years that the total cost of planting and harvesting the crop is about $6.30 per bushel.

2. In March, September Soybean futures (the time of harvest) are trading at $6.70 per bushel and the soybean farmer wishes to lock in the futures contract at this price.

Required:

a.      Should the farmer go long or short the futures contract?

b.      How many contracts does the farmer need to buy or sell to hedge the position?

c.      Compute the gain or loss (futures contract) for the farmer based on the assumption that in September (for delivery):

o. The Soybean futures price is $6.33 per bushel.

d.      Compute the return on investment with regard to one (1) futures contract.

Answer 1

a) Farmer should go for Short position on future contract because he has to sell the soyabin

b) N0 of contract =100000/5000

=20 contract

c) Gain on Future contract = (6.70-6.33) *100000

=$37000

d) Return on 1 future contract = Gain on 1 future contract / intial margin on 5000 bushel

=5000(6.70-6.33)/4375

=1850/4375*2

=84.57% Per annum