Disher Cotton Farms is a large cotton producer located near Lubbock, Texas. Each year Disher...
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Disher Cotton Farms is a large cotton producer located near Lubbock, Texas. Each year Disher plants its fields in cotton and then waits until the fall before the cotton is picked and sold. Disher knows that is cost of producting cotton is about $0.45 per pound. In April, when the cotton is planted, the current market price for cotton is $0.53. The October futures price is $0.51. Disher expects to produce 250,000 pounds of cotton this season.
a. If Disher does not hedge its cotton crop, what total revenue can it expect to receive in October?
b.If Disher does hedge its cotton crop in the future market, what total revenue can it expect to receive in October?
c.What type of hedge is this called?
d.What risks does Disher face if it sells its entire expected cotton crop in the futures market?
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