You are an Australian wheat producer (today) using ASX (Australian) wheat futures market to hedge your current crop due for harvest in December and sale in January the following year. The ASX futures exchange has set the initial (performance) margin for one wheat futures contract at AUD$10/tonne. Assume you hedge 100% of final production which equates to one ASX wheat futures contract. You estimate the local cash price for the quality of wheat you produce will be AUD$20/tonne over January futures price at the time you sell the physical wheat, the approximate net selling price you can lock in by hedging your position using January futures contract at AUD$400/tonne is:

Question

BlackTom AI · Accepted Answer

The basis is cash price minus futures price; with an expected basis of +AUD$20/tonne and a futures hedge entered at AUD$400/tonne, the locked-in net selling price is 400 + 20 = AUD$420/tonne.

1) Relevant concepts
- Basis = local cash price − futures price at delivery. Producers lock a cash price by selling (short) futures now and offsetting that position at sale time.
- Profit/loss on the futures position offsets changes in the cash/futures relationship, so the locked-in price equals the initial futures level plus the expected basis at delivery.
- Initial margin (AUD$10/tonne) is a collateral requirement and does not change the economic price received; it only affects cash flow/working capital.

2) Step-by-step reasoning
- You sell one January futures contract today at AUD$400/tonne (short futures).
- At sale time (January) the local cash price is expected to be AUD$20/tonne above the then-prevailing January futures price: Cash_Jan = Futures_Jan + 20.
- You close the futures hedge in January by buying back the futures at Futures_Jan. Futures P/L = Sell_price − Buy_price = 400 − Futures_Jan.
- Net selling price received = Cash_Jan + Futures P/L.

3) Calculation (showing intermediate steps)
- Cash_Jan = Futures_Jan + 20
- Futures P/L = 400 − Futures_Jan
- Net price = (Futures_Jan + 20) + (400 − Futures_Jan) = 400 + 20 = AUD$420/tonne

4) Why this is correct
The Futures_Jan terms cancel, so the result depends only on the initial futures price and the expected basis. The margin does not alter the locked economic price.

5) Why other options are incorrect
- AUD$400: ignores the expected +AUD$20 basis, so underestimates the cash outcome.
- AUD$410: assumes a +AUD$10 basis (not +20).
- AUD$380 / AUD$390: imply negative or smaller bases inconsistent with the given +AUD$20 expectation.

Conclusion: The approximate net selling price you can lock in is AUD$420/tonne, which matches the provided correct answer.

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