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Unformatted text preview: the sense
that it could have been in her pocket (if
she hadn’t entered into the futures contract with Johnson) and now it isn’t.
This situation might be okay with
Wilson. Wilson, remember, may not
want to be in the speculating business.
She might want to only be worried about
growing and selling corn and nothing
else. Maybe she doesn’t want to be
involved in speculating on the price of
corn. In other words, maybe she is willing to “give up” $8,300 now and then so
that she can sleep soundly at night and
not worry constantly about possible price
declines. You may remember from Chapter 8
that this wheat
farmer is a price
taker. He has to sell
his wheat at the
not a penny more or
less. How might a
farmer reduce the
uncertainty in the
wheat market? ANSWER: Let’s suppose that the price of corn rose to $4. In this case, Wilson
would have delivered 5,000 bushels of
corn to Speculator Johnson for $2.34 a
bushel, and then Johnson would have
turned around and sold the corn for $4 a
bushel. In this case, Speculator Johnson
earned the difference between $4 and
$2.34—or $1.66—for every one of the
5,000 bushels, for a total of $8,300.
Did Wilson, the farmer, lose this
$8,300? In a way she did. She didn’t lose it
in the sense that it was once in her pocket Currency Futures
A futures contract can be written for
wheat, as we have seen, or for a currency, a
stock index, or even bonds. Here is how a
currency futures contract works.
Suppose Bill owns a Toyota dealership in
Tulsa, Oklahoma. It is currently May and
Bill is thinking about a shipment of Toyotas
he plans to buy in August. He knows that he
must buy the Toyotas from Japan with yen,
but he has a problem. At the present time,
the dollar price of yen is $0.012. Bill wonders Section 3 Futures and Options 451 16 (428-459) EMC Chap 16 11/18/05 9:34 AM Page 452 what the price of yen will be in August when
he plans to make his purchase. Suppose the
dollar price of yen rises to $0.018. If the
price of the yen goes up, then instead of paying $30,000...
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This document was uploaded on 01/16/2014.
- Winter '14