MRKT 325 Study Guide - Comprehensive Final Exam Guide - Spot Contract, Grain Elevator, Futures Contract

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20 Nov 2018
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1
Department of Agricultural Economics
AECN/MRKT 325
Marketing of Agricultural Commodities
Module 1 (B)
A closer look into basis and futures hedging
ochanges in spot and futures prices
oimplications of changes in basis
Department of Agricultural Economics
Example: starting a short hedge
On June 19, 2018 a grain producer decided to use futures
contracts to sell soybeans for November 2018 delivery
ofutures price for November delivery was traded at $9.22/bu
Expected (projected) basis for November was $0.40/bu
oon June 19, producer estimated that the difference between spot
price in her local market and futures price for November delivery
will be $0.40/bu on the day she plans to deliver
Department of Agricultural Economics
Selling soybeans for November delivery with futures contracts
discount expected
basis for November
= $0.40/bu
target price for
November delivery
= $8.82/bu
locked-in price for
delivery in November
= $9.22/bu
First day (6/19/2018): lock in futures price
for November delivery and estimate your
target price for local delivery
8.82 = 9.22 + (0.40)
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2
Department of Agricultural Economics
Short hedge (selling with futures contracts)
In November, producer has two alternatives
(1) deliver to futures market and receive price traded when she
entered the futures contract in June
net price received = futures price traded in June transportation cost
Producer’s
farm
Delivery area
of futures
market
drive to delivery area, deliver corn and
pay transportation cost
get paid the price traded in June
Department of Agricultural Economics
Short hedge (selling with futures contracts)
In November, producer has two alternatives (cont’ed)
(2) get out of futures contract and sell to local elevator (or any other
buyer) at current spot price
oproducer is paid the current spot price
oproducer realizes a gain or loss when he offsets futures contract
net price received = spot price in November + gain/loss with futures
contract
Producer’s
farm
Delivery area
of futures
market
Sell to local buyer
and receives local
spot price
Offsets futures
contract; realizes
gain or loss
Department of Agricultural Economics
Fast forward to November: delivery time
Scenario A
Now we are in November and the producer is ready to
deliver her soybeans. Today (November)we have:
ospot price in her local cash market = $8.60/bu
ofutures price for November delivery = $9.00/bu
Producer wants to offset her futures contract and sell/deliver
grain to her local grain elevator
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Document Summary

Module 1 (b: a closer look into basis and futures hedging, changes in spot and futures prices, implications of changes in basis. Scenario a: now we are in november and the producer is ready to deliver her soybeans. Today (november) we have: spot price in her local cash market = . 60/bu, futures price for november delivery = . 00/bu, producer wants to offset her futures contract and sell/deliver grain to her local grain elevator. . 00/bu: gain in the futures market = Another look into the realized price: price received in the spot market today (november) = . 60/bu, gain in the futures market = sh. 22/bu, sold on june 19 @ Spot price turns out to be lower than projected, thus you lose sh. 22/bu. spot loss = futures gain. Both spot and futures prices went down by the same amount. both moved at the same speed difference between them stayed the same.

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