Economics_Ch16

# Myers agrees to buy 200 bushels of wheat for delivery

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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.

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