Suppose a farmer planted 2,000 acres of squash, with an average yield of 40 squash an acre. Squash prices are $10/squash, but are expected to fall. The producer can enter into a 4 month futures contract at a price of $9.50/squash. After 4 months, the producer will harvest and sell the crop. A standard squash contract is written for 5,000 squash. Should the producer adopt a long or short position? How many contracts does the producer need to buy to protect the entire crop? Suppose after 4 months the market price fell to $9/squash. How much higher or lower would the producer’s income be compared to the revenues earned without a futures contract?
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