# short heding and basis risk

#### stefany

##### New Member
Hi all,

I would like to have this brief exercise on future derivatives and basis risk solved because, although various trials, i cannot find the exact solution.

In February of the year N a farmer expects that his wheat, next July, will be 232,000 bushels.
For the hedge the farmer uses the CME where the wheat futures are traded with volume 5,000 bushels and the closest maturity is August.
Since there is a significant difference between the quality of the wheat in the contract and that produced by the farmer, an optimal hedging ratio has to be used (0.92).
The August future price, when the hedge is started, quotes 6.50/bushel.

HERE THE MAIN POINT: the hail that affected the spring brought about a considerable reduction in the crop that resulted to be 23% lower than expectation.

In July, when the farmer sells his crop and the future contract is closed, the August wheat future price is 7.68 per bushel with a basis 0.18 under (basis = spot price - future price).

Find the effective price per bushel gained by the farmer.

(The number of contract to enter in is the optimal hedging ratio * quantity of asset /volume of future.. Of course the number has to be rounded to the closest integer. It is 43 in this case).