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A farmer is planning to grow 20,000 bushels of corn. She will sell her crop...

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Finance

A farmer is planning to grow 20,000 bushels of corn. She will sell her crop one year from today. The cost of producing corn is $2.00 per bushel, payable in one year. The CBT offers futures contracts on corn. The contract size is 5,000 bushels and the one-year futures price is $4.00 per bushel. 1.1. Is the farmer naturally long or short corn? 1.2 The farmer wants to hedge her entire corn exposure with futures. How many contracts should she buy or sell? What is her hedged profits? 1.3 Instead of growing 20,000 bushels, the farmer decides to grow 32,500 bushels. How many contracts should she buy or sell to hedge? What is her hedged profits?

  1. Is the farmer naturally long or short corn?

  2. The farmer wants to hedge her entire corn exposure with futures. How many contracts should she buy or sell? What is her hedged profits?

  3. Instead of growing 20,000 bushels, the farmer decides to grow 32,500 bushels. How many contracts should she buy or sell to hedge? What is her hedged profits?

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