The decrease in corn prices he had feared did occur, and the cash price he received for his corn was less than his projection. Without Bill's accurate basis forecast, the projected selling price and realized selling price would have been different. In a hedged position, the producer trades price risk for basis risk. Once more, the basis forecast is a key to hedging with futures. The answer depends on the quantity produced.
Actual production determines the final average price per bushel.
This example illustrates the discipline necessary when hedging. Although Bill might be frustrated with the results of this selling hedge in a rising market, he should remember that the decision to hedge was made after careful analysis and his best price forecast. Advantages and Disadvantages of a Selling Hedge with Futures Advantages Disadvantages 1. Reduces risk of price declines 1. Gains from price increases are limited 2.