In March, a farmer sells December hog futures at $40.00 to hedge future hog sales. In December, the farmer buys back the futures contract at $36.00 and sells hogs in the cash market at $37.00. What is the net price received by the farmer (ignoring all commission fees)?

In March, a farmer sells December hog futures at $40.00 to hedge future hog sales. In December, the farmer buys back the futures contract at $36.00 and sells hogs in the cash market at $37.00. What is the net price received by the farmer (ignoring all commission fees)?

• A. $37.00
• B. $40.00
• C. $41.00
• D. $36.00

Answer: (C)

Hedging with futures combines your cash price with the gain or loss on the futures position. Here the farmer shorted December hog futures at 40 and later bought back at 36, so the futures contract yields a gain of 4 per hog. The actual cash sale brings 37 per hog. Add the futures gain to the cash price: 37 + 4 = 41.00. So the net price received, ignoring commissions, is 41.00 per hog.

Hedging with futures combines your cash price with the gain or loss on the futures position. Here the farmer shorted December hog futures at 40 and later bought back at 36, so the futures contract yields a gain of 4 per hog. The actual cash sale brings 37 per hog. Add the futures gain to the cash price: 37 + 4 = 41.00. So the net price received, ignoring commissions, is 41.00 per hog.