Finance School of Management Hedging Price Risk with Future Contracts Spot Price of wheat on Delivery date Farmer 's transaction $1.50 per bu. $2 per bu $2.50 per bu. Proceeds from sale of wheat to distributor Sl50,000 s20000 S250,000 Cash flow from the futures contract $50,000 0 S50,000 Paid to farmer P d aia byJarmer Total receipts S2000020000s20000 uesTc
11 Finance School of Management Hedging Price Risk with Future Contracts Spot Price of Wheat on Delivery Date Farmer ’s Transaction $1.50 per bu. $2 per bu. $2.50 per bu. Proceeds from sale of wheat to distributor $150,000 $200,000 $250,000 Cash flow from the futures contract $50,000 0 $50,000 Paid to farmer Paid by farmer Total receipts $200,000 $200,000 $200,000
Finance School of Management Hedging Price Risk with Future Contracts Spot Price of Wheat on Delivery Date Baker 's transaction S50 per bu. $2 per bu $2.50 per bu Cost of wheat bought from supplier S150,000 S200,000 S250,000 Cash flow from the futures contract S50,000 0 S50,000 Paid by be Paid to bake Total receipts S200,000 S200,000 S200,000 uesTc 12
12 Finance School of Management Hedging Price Risk with Future Contracts Spot Price of Wheat on Delivery Date Baker ’s Transaction $1.50 per bu. $2 per bu. $2.50 per bu. Cost of wheat bought from supplier $150,000 $200,000 $250,000 Cash flow from the futures contract $50,000 0 $50,000 Paid by baker Paid to baker Total receipts $200,000 $200,000 $200,000
Finance School of Management 300 □ Sale of 250 wheat □ Futures 2200 口Tota1 150 100 50 50 100 1.5 2 2.5 3 Price of Wheat at Delivery uesTc Date
13 Finance School of Management -100 -50 0 50 100 150 200 250 300 1 1.5 2 2.5 3 Sale of wheat Futures Total Price of Wheat at Delivery Date Fa r m e r’s R e ve n u e