Long hedge example with futures
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"This guide describes how to place an input (long) hedge in the futures market to reduce the price risk associated with buying an input. For example, assume that Heidi, a swine producer, knows she will be buying a pen of feeder pigs two months from now. To feed the pigs, Heidi will need 5,000 bushels of corn (one full contract at the Chicago Board of Trade) during the next four months to use in the production of feed. Corn is an input into the production of swine. Currently, the local cash corn price is $3.85 per bushel, and Heidi believes that the price may rise during the next few months. She calculates her cost of production and knows that $3.85 per bushel will allow for profit potential. What can Heidi do to protect against higher prices for the corn she needs? She could purchase the grain now but would have to pay for storage during the next few months, increasing the cost above $4.00 per bushel. Alternatively, Heidi could wait to buy in the cash market while entering the futures market now to offset any potential cost increase (increase in price) with a gain in the futures market."--First page.
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Provided for historical documentation only. Check Missouri Extension and Agricultural Experiment Station websites for current information.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 License.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 License.