Suppose a farmer has all his wealth in wheat and owns 1,000,000 bushels of it.

| September 12, 2016

Question
Suppose a farmer has all his wealth in wheat and owns 1,000,000 bushels of it. Assume further that the cash price is $5 per bushel today and the risk free interest rate is 5%.
a) If the wheat price drops to $3 per bushel tomorrow, what will be his wealth?

b) Suppose the August futures contract matures in exactly 3 months from today, what should be the futures price today and tomorrow?

c) If he wants to lock in a sell-price today, should he be long or short? If the contract is 5000, how many contracts? What will be his wealth tomorrow?

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