It is September 10 and Mr. James is making final estimates of this year’s wheat crop. His production is turning out to be much better than anticipated. This causes concern because if his production is...

It is September 10 and Mr. James is making final estimates of this year’s wheat crop. His production is turning out to be much better than anticipated. This causes concern because if his production is better than expected, other farmers must be experiencing the same situation. The current spot price is $2.25 per bushel, and the October wheat futures (5,000 bushels per contract) price is $2.52 per bushel. At the current spot price, Mr James would just break even with his anticipated 60,000 bushels. His wheat will not be ready until October.
a) What can Mr James do to ensure his profitability? Is this a long or a short hedge? Why?

b) At harvest time in October, Mr James’ concerns are realized in that the cash price has dropped to $1.70 per bushel. Compute Mr James’ payoff on wheat futures, assuming he hedged his anticipated production and his final yield was 60,000 bushels.
c) Suppose Mr James’ production turned out to be only 50,000 bushels. Compute his net revenue and compare it with what it would be if he were able to sell all 60,000 bushels. What is the change?
d) What is the essential feature of a forward contract that makes a futures contract a type of forward contract?