A farmer sells futures contracts at a price of $3.65 per bushel. The spot price of corn is $3.15 at contract expiration. The farmer harvested 21,000 bushels of corn and sold futures contracts on 20,000 bushels of corn. Ignoring the transaction costs, how much did the farmer improve his cash flow by hedging sales with the futures contracts? Group of answer choices   9,500 10,500 8,900 10,000 9,000

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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A farmer sells futures contracts at a price of $3.65 per bushel. The spot price of corn is $3.15 at contract expiration. The farmer harvested 21,000 bushels of corn and sold futures contracts on 20,000 bushels of corn.

Ignoring the transaction costs, how much did the farmer improve his cash flow by hedging sales with the futures contracts?

Group of answer choices
 
9,500
10,500
8,900
10,000
9,000
Expert Solution
Step 1

The futures contract refers to the derivative contracts in which two parties of the contract agree to buy and sell an underlying security at the maturity or expiration. The seller of the contract benefits if the prices go down. 

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