Can somebody explain the economics in A Deal in Wheat in a manner that makes sense?

Asked on by holmcc

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

I don't know how much you know, so I'm sorry if I pitch this too low for you...

What is going on in this story is that Hornung and Truslow and their respective sides are essentially gambling on the price of wheat.  They are trading wheat futures.

When one side offers to sell a future, they are promising to sell the other guy X amount of wheat at price Y at some given point in the future.  The seller is betting the price of wheat will be low (that is a bear) and the buyer is betting the price of wheat will be high (they are called bulls).

At the specified point in the future, the seller has to get wheat from somewhere to sell.  If they can get it for $1.10 a bushel and their future contract promised to sell it at $1,50, they make 40 cents per bushel.  If they have to buy for more than $1.50, they lose money.

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