Interview With Hank Who Buys And Stores Wheat

Question 1

Why would it be easier for hank to sell wheat at the same time he buys it?

Answer 1

He could work out costs for storage, interest, warehouse storage and stransport costs to lock in a profit margin

Question 2

What what differentials would hank be at risk on of he could see straight away?

Answer 2

If interest or transport rates increased before shipping

Question 3

What does hank do if he can’t sell straight away?

Answer 3

Sell futures as a hedge.

Question 4

When hank buys physical wheat from a farm…

Answer 4

He sells the equivalent amount in the futures market

Question 5

Why would hank sell the equivalent amount in the futures market?

Answer 5

It elimanates his risk in the movement of the OUTRIGHT price of wheat.

Question 6

If the prices go down for the outright price of wheat…

Answer 6

Hank will make money on the futures - his futures hedge but he will lose an offsetting amount of money on physical wheat

Question 7

If he has sold wheat for a certain price in the future and the outright price of wheat goes down

Answer 7

Then hank makes money on his futures sale because they stay the same price he sold them at which is now higher than the outright price of wheat

Question 8

If the price of wheat goes up…

Answer 8

He will lose money on the futures hedge as he sold it for a cheaper price l, but he gains an offsetting amount in physical wheat

Question 9

The outright price of wheat doesn’t matter

Answer 9

Because the gains and losses between the futures hedge price and physical price should balance themselves out

Question 10

The trader is not interested in the outright price, but most interested in

Answer 10

The prices of that commodity in different geographies, times and forms

Question 11

It’s the price,…. That matters not the outright price

Answer 11

Price differential

Question 12

Outright price =… Price

Answer 12

Flat price

Question 13

There is a different…. For each delivery month for each contract

Answer 13

Basis

Question 14

Basis =

Answer 14

Cahs price minus futures price

Question 15

What does a trader do of he thinks the cash price is too high relative to the futures?

Answer 15

Sell the basis

Question 16

What does a trader do of he thinks the cash price is too low relative to the futures price?

Answer 16

Buy the basis

Question 17

What would happen if wheat goes up in short and long term? Because of the weather r

Answer 17

Speculators would push the price of wheat futures higher, making the spread with physical wheat price bigger. You would lose more money on futures than on physicals

Question 18

What is the biggest produced wheat in US?

Answer 18

Winter wheat 70-80pc of total production

Question 19

Chicago mercentaile exchange CME trades

Answer 19

Soft red winter wheat for flour and bread

Question 20

Kansas city board of trade trades..

Answer 20

Red winter wheat, bread making

Question 21

Where do you hedge your wheat? What are risks

Answer 21

You could be at risk on price differential between specs of wheat bought and hedged on futures market, and at risk om geography. Transport costs between rigion changes.

Question 22

All hank does is trade the….

Answer 22

Basis.

Question 23

Hank trades the basis,

Answer 23

The differential between physical wheat and the futures market.

Question 24

Hnak anticipates… But hedges on….

Answer 24

Changes in the basis… The outright price

Question 25

Commodity trading is….

Answer 25

Selling something you don’t have to someone who doesn’t want it

Question 26

Why is commodity trading from someone who doesn’t have it to someone who doesn’t want it.

Answer 26

The farmer doesn’t have the grain he is selling and hank doesn’t want the grain, he’s only buying it ahead of harvest because the farmer wants to sell it ahead of harvest.

Question 27

What is a farmer scared of?

Answer 27

If his neighbours increase the amount of land they sow, by the time harvest comes around the price of wheat may have dropped below his production costs