A cotton buyer will be making a purchase of 245,000 pounds of cotton on March 1. The buyer recognizes the price risk in the market and chooses to hedge as much of this purchase without over hedging. The appropriam contract is trading at $0.80/pound. His expected basis is -S0.04/pound. On March 1, the cotton buyer purchases 265,000 pounds of cotton in the cash market at a price of S0.90/pou appropriate futures contract is trading at $0.92/pound. 9. Determine his overall outcome (realized revenue) from both the cash and futures transactions.

A cotton buyer will be making a purchase of 245,000 pounds of cotton on March 1. The buyer recognizes the price risk in the market and chooses to hedge as much of this purchase without over hedging. The appropriam contract is trading at $0.80/pound. His expected basis is -S0.04/pound. On March 1, the cotton buyer purchases 265,000 pounds of cotton in the cash market at a price of S0.90/pou appropriate futures contract is trading at $0.92/pound. 9. Determine his overall outcome (realized revenue) from both the cash and futures transactions.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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After collecting basis data, a canola grower feels that 775 dollars per tonne is a realistic forward cash price for the fall’s crop since November canola futures are trading at 800 dollars per tonne. To hedge, the producer purchases an at-the-money PUT for 20 dollars tonne on May 19th. While the hedge was in place, canola producers in Europe experienced crop failures and consumers in China began to import large quantities of canola produced in Canada. By October 15th, November canola futures had risen to 825 dollars per tonne. However, because of increased local production, the basis in the grower’s region weakened by 5 dollars tonne. On October 15th the grower sold his canola in the cash market. Use T-accounts to answer the following: a. What is the net selling price from hedging using the PUT? b. What price would the producer have received if he had hedged using futures? Need answer in short!
Fred enters into a futures contract to buy 10,000 pounds of cotton for $8 per pound. The initial margin is 5% of contract value, and the maintenance margin is 75% of the initial margin. What price (per pound) of cotton futures will trigger a margin call? ______. What amount would Fred’s broker have to post in response to this margin call? ______.
A farm that produces corn is looking to hedge their exposure to price fluctuations in the future. It is now May 15th and they expect their crop to be ready for harvest September 30th. You have gathered the following information: Bushels of corn they expect to produce 44,000 May 15th price per bushel $3.08 Sept 30 futures contract per bushel $3.22 Actual market price Sept 30 $3.37 Required (round to the nearest dollar): Calculate the gain or loss on the futures contract and net proceeds on the sale of the corn. Net gain or loss on future $Answer Sell the corn $Answer Net $Answer
A trader enters into two short cotton futures contracts when the futures price is 80 cents per pound. The contract is for the delivery of 50,000 pounds. How much does the trader gain or lose if the cotton price at the end of the contract is (a) 77.20 cents per pound; (b) 82.30 cents per pound? a. If the cotton price at the end of the contract is 77.20 cents per pound, the gain/loss for the trader with the short position is: $____________ b. If the cotton price at the end of the contract is 82.30 cents per pound, the gain/loss for the trader with the short position is: $_____________ Only typed answer and give fast
This is a follow up question so I copied/pasted the same question below for your convenience: An investor enters into a long futures position to buy 5,000 bushels of wheat for 575 cents per bushel. The initial margin is $5,000 and the maintenance margin is $2,500. c. Starting from the original position, the investor would have to see a price movement of _____ cents (above/below) ______ 575 cents in order to withdraw $2,000 from the margin account. So Initial Margin = $5,000;Maintenance Margin = $2,500;Withdraw Amount = $2,000;Original Price per Bushel = 575 cents or $5.75;Number of Bushels = 5,0001. How did you come up with the calculation? You wrote that: (new_price * 5000)/(5.75 * 5000) = withdraw amount/mainenance margin 2. Could you please explain the right side (i.e., why the ratio is withdraw amount to mainenance margin)?
The futures price of a commodity such as wheat is $2.50 a bushel. Futures contracts are for 10,000 bushels, and the margin requirement is $2,500 a contract. The maintenance market requirement is $1,000. A speculator expects the price of the commodity to rise and enters into a contract to buy wheat. d. If the futures price rises to $2.70, what must the speculator do? e. If the futures price continues to decline to $2.32, how much does the speculatorhave in the account?
You are a futures trader on Lean Hog at Kantar, New York. You have the following information on Lean Hog. The standard deviation of monthly changes in the spot price of Lean Hog Futures is (in cents per pound) 5. The standard deviation of monthly changes in the futures price of Lean Hog Futures the closest contract is 8. The correlation between the futures price changes and the spot price changes is 0.8. It is now December 17, 2019. Your client, a pork producer, is committed to purchasing 400,000 pounds of lean hog on January 15. The producer wants to use February Lean Hog futures contracts to hedge its risk. Each contract is for the delivery of 40,000 pounds of cattle. a. What is the optimal hedge ratio? (sample answer: 0.45 or 45%) b. Should the pork producer take a long or short hedge? (sample answer: short or long) c. How many contracts of lean hog futures does your client need to take to hedge the risk? (sample answer: 6 contracts)
The futures price of a commodity such as wheat is $2.50 a bushel. Futures contracts are for 10,000 bushels, and the margin requirement is $2,500 a contract. The maintenance market requirement is $1,000. A speculator expects the price of the commodity to rise and enters into a contract to buy wheat. a. How much must the speculator initially remit? b. If the futures price rises to $2.60, what is the profit and return on the position? c. If the futures price declines to $2.47, what is the loss on the position?
A copper futures contract requires the long trader to buy £ 25,000 of copper. The trader buys one November copper futures contract at $ 0.75 per pound. According to historical data, copper prices moved in the range of $ 0.53-0.87 per pound. The market is confident that this trend will continue in the future. What is the maximum loss this trader can have? Another trader sells one November copper futures contract. What is the maximum loss this short trader can have?
The price of the July corn futures is $4.13, and the September corn futures are 10 cents higher. A trader thinks that the spread between July and September will contract.a. How would the trader use a spread order to bet on your view?b. Did the trader buy or sell the spread?c. How much money would you make if the price of July corn futures increases to $5.00 and the September contract drops to $4.50. Assume the spread trade was for 5000 bushels of corn.
Consider a farmer who plans to sell 6,000 bushels of corns on date T. The date-T spot price of corn is normally distributed with mean $500 per bushel and standard deviation $50 per bushel. To hedge the price risk, the farmer considers shorting corn futures with delivery on date T. The futures price is $480 per bushel, and one contract is to deliver 5,000 bushels. In addition, the farmer can take only integer number of contracts (i.e, a fraction of contract such as 0.1 is NOT allowed). (a) How may contracts does the farmer need to take? (b) What is the mean of the total revenue? (c) What is the standard deviation of the total revenue?
An investor enters into a long futures position to buy 5,000 bushels of wheat for 575 cents per bushel. The initial margin is $5,000 and the maintenance margin is $2,500.a. To trigger a margin call the price would have to (rise above/fall below) _______ cents per bushel.b. If the price moved 10 cents farther than the minimum move described in part a, the amount of variance margin required of the investor would be $_______.c. Starting from the original position, the investor would have to see a price movement of _____ cents (above/below) ______ 575 cents in order to withdraw $2,000 from the margin account.

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