Question

A baker is interested in buying 5000 bushels of wheat on September 2020. He has a target price of $3.15/bushel and wants to hedge against upward price movements. There are no wheat futures contracts with maturity in September, but there are wheat futures with maturity in November. The size of one wheat futures contract with maturity in November is 1000 bushels. What should be the baker’s strategy to hedge against upward price movements?

Answer 1

Long 5 November fates for wheat today, counterbalance position on September 2020, purchase wheat in the spot showcase in September 2020.

Step-by-step explanation:

The risk included is upward development in the value, the helpful situation in prospects would be taking long position. Since, the fates are accessible for November month, take long situation on November and balance the situation in September by taking short situation for November month and purchase the wheat in the spot market.