On January 15, a farmer knows that he/she will have to sell 40,000 bushels of corn in 6 months’ time.

On January 15, a farmer knows that he/she will have to sell 40,000 bushels of corn in 6 months’ time. The farmer is worried that the price of corn is going to decrease in the next 6 months and takes a short position in 80 September corn futures contracts. The futures price is £20 per bushel on January 15. Each futures contract is for the delivery of 500 bushels of corn. On July 15, the farmer sells the 40,000 bushels of corn at the spot price and closes the futures position with an offsetting transaction. At the expiration of the hedge (July 15), the spot price of corn is £25 per bushel and the futures price is £26 per bushel. What are the total proceeds from the sale of the 40,000 bushels of corn? Consider the gains or losses from the futures contracts when computing the total proceeds. Is the price per bushel realised by the farmer equal to the futures price at which he/she entered into the futures position on January 15? If it is not equal, explain why the price per bushel is different from the initial futures price.

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