Refer to Table 23.1 in the text to answer this question. Suppose your firm produces breakfast cereal and needs 165,000 bushels of corn in December 2020 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 December.
a. How could you use corn futures contracts to hedge your risk exposure? What price would you effectively be locking in based on the closing price of the day?
b. Suppose corn prices are $3.23 per bushel in December. What is the profit or loss on your futures position? Explain how your futures position has eliminated your exposure to price risk in the corn market. Table 23.1: