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I need help with this… I understand when the price decreases, but I don’t understand when the price increases. How can the rancher lose $10 per pound when by buying a future contract for $150 and selling it for $160. Isn’t that a gain? I am so confuse.
A March futures contract is purchases for a price of $150
• For simplicity, assume the rancher antipates (and does sell) selling
50,000 pounds (1 contract)
• Spot prices are currently $155
• What happens when the spot price is March decreases to $140?
– Rancher loses $10 per 100 pounds on the sale from the decreased price
– Rancher gains $10 by selling the futures contract for $150 and immediately buying (to close out) for $140
– Effective price of the sale is $150
• What happens when the spot price is March increases to $160?
– Rancher gains $10 per 100 pounds on the sale from the increased price
– Rancher loses $10 by buying the futures contract for $150 and immediately selling (to close out) for $160
– Effective price of the sale is $150
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