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Suppose ABC Cereals manufactures high quality breakfast cereal. The company will need to buy 15,000...

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Accounting

Suppose ABC Cereals manufactures high quality breakfast cereal. The company will need to buy 15,000 bushels of wheat for September production which is several months away. The price of wheat today is $4.00 a bushel and futures contracts that expire in late August just in time for September production have futures price of $5.00 per bushel. The company locks in the futures price by entering the contract. Wheat prices in late August, at expiration of the futures, turnout to be $3.50 per bushel. Wheat contract size is 5,000 bushels.

1) How many contracts does the company need to hedge this position?

2) Should the company go long or short the futures contracts?

3) What was the profit or loss on the spot position, futures position and overall?

Refer to the ABC Cereals wheat futures contract example above. Using the same prices you selected in that problem, answer the following assuming basis = s-f 1) What was the basis per bushel when the futures were entered?

2) What was the basis per bushel when the futures contract expired?

3) How would you check your work?

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