Commodity Futures Markets: Hedging Wheat (Essay Sample)
In this assignment you have the chance to have a little fun and learn something about price discovery, price determination, and commodity futures markets along the way. The goal – make money by speculating in the commodity futures market! The rules – there are many! Keep reading to find out how to make money and turn in an outstanding assignment. By the way, there will be a prize for the individual who makes the most money and does not incur any penalties!source..
Commodity Futures Markets
COMMODITY FUTURES MARKETS
Game plan and Hedging wheat with futures contract
While prices and the futures market fluctuate over time like other commodities, the futures contracts are necessary for hedging purposes. I will identify the initial price offer that will reduce the risk of losses, which is $ 470 based on the belief that the US Wheat Futures will rise between March 22 and April 20 2018. When the hedging strategy is effective, it is more likely that there will be reduction in the risk of loss in the wheat market, and the outcomes from wheat futures contact also depend on market expectations. As wheat is a major agricultural commodity, future contract on the product capture the prevailing market sentiments on the direction of the agricultural industry. I decided to buy the commodity on March 23, 2018 and then sell on April 20 for the July 18 future contracts. Purchasing wheat allows one to choose the quantity that they deemed necessary and this can be changed depending on market changes and price trends. While there have been fluctuations in the future price, there have mostly been on upward trend. On Feb 22, 2018 the US wheat futures was 450.75 and on Mar 22, 2018 it was 456.50, whereas on Apr 20, 2018 the price had increased to 463.50
Graphical representation of the settlement price
Significant price movements/fluctuations you observed during the trading period
There was a noticeable rise in prices in the first week of April 2008 after March 29, at a time when the U .S. Department of Agriculture (USDA) reports and on planting surveys from US producers were released. The US wheat farmers have struggled to expand their export levels in the past 5 years, and this is especially with winter drought in the previous season. Quarterly surveys on wheat feed demand provide insights on how much is available from the traders and producers. The demand for wheat in the US has mostly been stable, but other exporting countries are expanding their market share in the international market. The rise in prices in from the third to tenth April 2018 reflect concerns about the supply of wheat with the winter producing areas having been affected by a decline in production because of weather, while there were expectation that there would be lower demand for the precut with some farme...
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