Suppose the farmer takes a futures position on his expected production of wheat in September. Will this strategy help him reduce his risk? Explain why.
A farmer is currently growing wheat and plans to sell it in September next year. He needs to plan his budget now, because of upcoming expenses. Suppose that the futures price of wheat for September delivery is £100 per ton. There is 50% probability that the spot price of wheat in September will be £90 per ton or £110 per ton.
Suppose that the farmer is not certain about the quantity of wheat he will sell in September. For each possible price of wheat, there are two equally likely quantities, i.e., there are four equally likely price-quantity pairs, which are shown in the Table that is attached as an image below.
Based on the above information and table attached in the images, please answer following question:
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Suppose the farmer takes a futures position on his expected production of wheat in September. Will this strategy help him reduce his risk? Explain why.
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