Explanation:
The farmer is effectively long soybeans, so he will want to sell soybean futures in order to lock in his selling price. By being long soybeans and short soybean futures, the farmer will be hurt if the futures price increases faster than the spot price, causing the basis to decrease, which is referred to as a weakening of the basis. Note that a strengthening of the basis, or the spot price increasing by more than the futures price, which causes an increase in the basis, would be to the farmer's advantage. A decrease in storage costs and interest rates would decrease the farmer's opportunity cost for having the soybeans (rather than the cash), which would be another advantage to the farmer by being long the asset and short the futures.
(Book 3, Module 34.1, LO 34.c)
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Question 67 A soybean farmer is looking to hedge the price risk of selling his soybean crop in the fall through the use of soybean futures contracts. Which of the following types of basis risk would be most detrimental to the farmer if he decides to unwind his futures position before futures expiration?
A
A weakening of the basis.
B
A strengthening of the basis.
C
A decrease in storage costs.
D
A decrease in interest rates.
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