In a hedge, a farmer sells futures at 5.35 and buys back at 4.85, then sells cash soybeans at 5.15. What is the net price per bushel received?

In a hedge, a farmer sells futures at 5.35 and buys back at 4.85, then sells cash soybeans at 5.15. What is the net price per bushel received?

• A. 5.15
• B. 5.35
• C. 5.65
• D. 4.85

Answer: (C)

When you hedge with futures, the final price you effectively receive combines the cash price of the commodity with the gain (or loss) from the futures hedge. The gain from the futures hedge is the difference between the price you sold the futures for and the price you buy them back at. Here, selling futures at 5.35 and offsetting at 4.85 gives a gain of 5.35 − 4.85 = 0.50 per bushel. You also sell the cash soybeans for 5.15 per bushel. Add the futures gain to the cash price: 5.15 + 0.50 = 5.65 per bushel. So the net price received is 5.65 per bushel. This shows how hedging adds the futures gain to the cash price to determine the total revenue per bushel.

When you hedge with futures, the final price you effectively receive combines the cash price of the commodity with the gain (or loss) from the futures hedge. The gain from the futures hedge is the difference between the price you sold the futures for and the price you buy them back at. Here, selling futures at 5.35 and offsetting at 4.85 gives a gain of 5.35 − 4.85 = 0.50 per bushel. You also sell the cash soybeans for 5.15 per bushel. Add the futures gain to the cash price: 5.15 + 0.50 = 5.65 per bushel. So the net price received is 5.65 per bushel. This shows how hedging adds the futures gain to the cash price to determine the total revenue per bushel.