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Loss and Gain Calculations

Greg recently inherited a large, family-run farm that primarily produces grain for harvest each year. Greg has recently been researching the use of futures contracts to improve his returns on his crop each year and reduce the price risk at harvest time. Greg decides to enter into a futures contract on his grain harvest in March once the crops are in. The current futures price per bushel of grain is $290.50. By May, the price per bushel had grown to $298 per bushel. A contract calls for the delivery of 1,000 bushels of grain.

-Calculate the long position gain or loss in this scenario.
-Calculate the short position gain or loss in this scenario.
-Would you recommend doing future contracts like this to Greg? Why, or why not?
-Explain how futures contracts can be both good and bad for someone in Greg's position.

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Solution Preview

If Greg is in a long position, he is entitled to buy the bushel at a price of 290.50. This means that he can sell the bushel at the market price of 298 and thus, make a gain of 7.5 per bushel or total gain of 7500 on 1000 bushels of grain.

If he is in a short position, he will have to sell his produce at ...

Solution Summary

Futures loss or gain calculation for a scenario.