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Unformatted text preview: close to $2 a
bushel. Why not promise the miller that I
will deliver him as much wheat as he wants
in six months if, in return, he agrees today to
pay me $3 a bushel for it? Then, in six
months, I will buy the wheat for $2 a bushel,
sell it to the miller for $3 a bushel, and earn
myself $1 profit per bushel.”
Myers, the miller, and Smith, the speculator, enter into a futures contract. Myers
agrees to buy 200 bushels of wheat for delivery in six months; Smith agrees to sell 200
bushels of wheat to Myers for delivery in six
months. 16 (428-459) EMC Chap 16 12/28/05 2:49 PM Page 451 What does each person get out of the
deal? Myers, the miller, gets peace of mind.
He knows that he will be able to buy the
wheat at a price that will let him earn a profit
on his deal with the baker. Smith takes a
chance, which she is willing to take, for the
chance of earning a profit.
Wilson is a farmer, who
grows primarily corn. The current price of
corn is $2.34 a bushel. Wilson doesn’t have
any corn to sell right now, but she will in two
months. She hopes that between now and
then, the price of corn won’t fall, say, to
something under $2. She decides to enter
into a futures contract in corn. She promises
to deliver 5,000 bushels of corn two months
from now for $2.34 a bushel. Johnson, a
speculator in corn, decides that this deal is a
good one for him because he believes that in
two months the price of a bushel of corn will
rise to $3.14. So Wilson and Johnson enter
into a futures contract. Two months pass and
the price of corn drops to $2.10. Johnson
turns out to be wrong about the price rising.
So, Wilson delivers 5,000 bushels of corn to
Johnson, for which Johnson pays Wilson
$2.34 a bushel (total: $11,700) as agreed.
Then Johnson turns around and sells the
corn for $2.10 a bushel (receiving $10,500).
Johnson loses $1,200 on the deal.
EXAMPLE: QUESTION: In the example, the price of corn went down. It could have gone up,
though. In this case, would Wilson, the
farmer, have lost money? and now it isn’t. She lost it in...
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This document was uploaded on 01/16/2014.
- Winter '14