Suppose a farmer anticipates to harvest 500,000 bushels of soybeans. Contract size is 5,000 bushels. The...

Suppose a farmer anticipates to harvest 500,000 bushels of soybeans. Contract size is 5,000 bushels. The initial margin and maintenance margin for soybean futures are $1,980 and $1,800 per contract, respectively. Currently, the farmer has $200,000 cash in his brokerage account, and the price of March 2021 soybeans futures contract is $10.00/bushel.

A.) describe how the farmer would hedge his harvest. Clearly state the number of soybeans futures contracts the farmer should buy OR sell.

b.) how much money would the farmer recieve (if any) and what is his account balance immediately after the farmer establishes his futures position?

Expert Solution

(A)

Farmer harvest means he require to sell so Farmer hedge his harvest by selling in future.

No. of Contract = Harvests Bushels of soybeans / Contract size of bushels = 500,000/5,000 = 100 Contracts.

100 number of soybeans futures contracts the farmer should sell.

(B)

Initial Margin Require = $1,980 x number of contracts = $1,980 x 100 = $198,000

Balance left in Account = $200,000 - $198,000 = $2,000

No money will be received by the farmer after the farmer establishes his futures position.

jeff jeffy answered 2 years ago

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