High School

Farmer Carter will harvest 250,000 bushels of corn in 4 months. The current spot rate is $4 a bushel. Forward rate on a 5 -month Future contract ( 5000 bushels) is $3.5 a bushel. In 4 months, the spot rate is $3.2 a bushel and the forward rate of the Future contract is $3.0 a bushel. What is the opportunity loss?
A)125000
B) 200000
C) 75000
D) 800000
E) 500000
F) 1000000
G) 100000
H) 250000
I) 875000
J) 925000
K) 750000

Answer :

The correct option is c) 75000. The opportunity loss for Farmer Carter is calculated based on the difference between the initial forward rate and the actual spot rate at the time of sale, multiplied by the total number of bushels. The loss amounts to $75,000.

The opportunity loss for Farmer Carter can be calculated by comparing what he would have made if he'd sold his corn at the initial forward rate compared to the actual spot rate at the time of harvest. Initially, the forward rate for a 5-month future contract was $3.5 a bushel, but the spot rate fell to $3.2 a bushel when he was ready to sell. To find the opportunity loss, we calculate the difference between the two rates and multiply by the total number of bushels.

  • Opportunity Loss = (Initial Forward Rate - Actual Spot Rate) x Total Bushels
  • Opportunity Loss = ($3.5 - $3.2) x 250,000 bushels
  • Opportunity Loss = $0.3 x 250,000 bushels
  • Opportunity Loss = $75,000

Therefore, the correct option is c) 75000.

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