Forwards and Futures

suresh.wadhwani2009
Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Forwards and Futures

Postby suresh.wadhwani2009 » Sat Apr 07, 2012 8:46 pm

@Content Pristine Pls explain

The spot price of corn on April 10 is 207 cents/bushels. The futures price of the September contract is 241.5 cents/bushels. If hedgers are net short, which of the following statements is most accurate concerning the expected spot price of corn in September?

A. The expected spot price of corn is higher than 207
B. The expected spot price of corn is lower than 207.
C. The expected spot price of corn is higher than 241.5
D. The expected spot price of corn is lower than 241.5

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content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Forwards and Futures

Postby content.pristine » Wed Apr 11, 2012 2:26 pm

Hi Suresh,

The key to answering this question is from the part "If hedgers are net short".
First of all, the current spot price is irrelevant for this question.

Now, if we say that most of the people are taking a short position, that means everyone is selling futures (to protect their asset position). And when everyone is selling futures, the futures price gets pushed down. (You can relate this to stock prices: Like in Satyam's case, when everyone starts selling, the stock price crashed down) Since we are talking about "hedgers" we are referring to prices of the futures market. However, we do not see the same selling pressure in the spot market. Thus, the expected future spot price should be higher than the futures price.

Hope this helps ;)


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