In other words maybe she is willing to give up 8300

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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 equilibrium price— 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.

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