If the corn harvest today is poor, would you expect this fact to have any effect on today’s futures prices for corn to be delivered (post-harvest) two years from today? Under what circumstances will there be no effect?
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If the corn harvest today is poor, would you expect this fact to have any effect on today’s futures prices for corn to be delivered (post-harvest) two years from today? Under what circumstances will there be no effect?
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- Suppose that the current spot price of corn is $720 per bushel. The one year risk-free rate is 6% per annum. The futures price for delivery of one bushel of corn in one year’s time is $792 per bushel. Assume that net costs (storage costs minus convenience yield) are $15 per bushel (over the next one year). Is the futures contract correctly priced? If not, what is the theoretically correct price for the futures contract and how could you take advantage of any mispricing? Please show full steps and explain.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 $AnswerSuppose, on a certain day in February, a speculator observes the following prices in the foreign exchange and currency futures markets: GBP/USD spot: 1.6465 March futures: 1.6425 September futures: 1.6250 December futures: 1.6130 The speculator thinks that the markets are overestimating the weakness of sterling (GBP) against the dollar. How can she act on this view to make a profit? Under what circumstances do her actions lead to a loss?
- (a) What is the difference between a “hedger” and “arbitrager?" (b)What is the difference between a “speculator” and an “arbitrager?” (c)Suppose that you observe today, June 16, 2021, that the spot price for corn is $5.74 per bushel and the January 2022 futures price is $5.95 per bushel. You expect corn will sell in January 2022 for a price of $6.50 per bushel. For you, the cost of storing corn per month is 3 cents per bushel. a. If you are a speculator, what do you do? _______________________ b. If you are an arbitrager, what do you do? _______________According to the given figure of the treasury yield curve in the US as of June 2020, what is the market predicting about the movement of future short-term interest rates? What might the yield curve indicate about the market’s predictions about the inflation rate in the future? Answer the question according to the discussed yield curve theories in the course. Consider the COVID-19 pandemic and the ongoing financial developments for building your arguments.Your farm is producing wheat. You worry that the price of wheat is falling every year and decided to do some hedging in the futures market. Unfortunately, the market does not currently have futures on wheat. Instead, you found out that there is a liquid corn futures market and historically wheat and corn price movements are positively correlated. Corn prices are moving apporximately 90% of wheat movements (if the wheat price changes by +/-10% the corn price will change about +/-9% (=10%*90%). Today's per bushel wheat price is $5.2 and per bushel corn price is $3.5. Your farm need to hedge for about 100,000 bushels of wheat for next year. Contract size of corn futures is 100 bushels per contract. Come up with a hedging position including the number of futures contracts for your farm.
- It is now January. The current interest rate is 2%. The June futures price for gold is $1,500, whereas the December futures price is $1,510. Is there an arbitrage opportunity here? If so, how would you exploit it?Suppose the standard deviation of monthly changes in the price of a commodity is 0.4. The standard deviation of monthly changes in futures price for a contract on commodity B (similar to commodity A) is 0.5. The correlation between the futures and commodity price is 0.88. What is the hedge ratio and the optimal number of contracts if the commodity trader wants to hedge 10000 bushels and one contract is on 100bushels? Hedge ratio should be rounded off to three decimal places and optima number of contracts should be in whole numbers.With a dry summer forecast, you expect that the soybean harvest will be smaller than normal and that soybean prices will rise. To speculate on this expectation, you buy 10 soybean futures contracts with a September maturity. The soybean futures price when you initiate the long position is $14.00 per bushel. By August the soybean futures price has risen to $16.00 per bushel. You execute an offset trade. What is your cumulative profit on the trades?
- Suppose that the standard deviation of quarterly changes in the prices of a commodity is $0.65, the standard deviation of quarterly changes in a futures price on the commodity is $0.81, and the coefficient of correlation between the two changes is 0.8. What is the optimal hedge ratio for a three-month contract? What does it mean? Explain what is meant by basis risk when futures contracts are used for hedging.Your farm is producing wheat. You worry that the price of wheat is falling every year and decided to do some hedging in the futures market. Unfortunately, the market does not currently have futures on wheat. Instead, you found out that there is a liquid corn futures market and historically wheat and corn price movements are positively correlated. Corn prices are moving approximately 90% of wheat price movements (if the wheat price changes by ±10%, the corn price will change about ±9% (= 10% * 90%). Today’s per bushel wheat price is $5.2 and per bushel corn price is $3.5. Your farm needs to hedge for about 100,000 bushels of wheat for next year. Contract size of corn futures is 100 bushels per contract. Come up with a hedging position including the number of futures contracts for your farm. Cross-Hedging QuestionYour farm is producing wheat. You worry that the price of wheat is falling every year and decided to do some hedging in the futures market. Unfortunately, the market does not currently have futures on wheat. Instead, you found out that there is a liquid corn futures market and historically wheat and corn price movements are positively correlated. Corn prices are moving approximately 90% of wheat price movements (if the wheat price changes by ±10%, the corn price will change about ±9% (= 10% * 90%). Today’s per bushel wheat price is $5.2 and per bushel corn price is $3.5. Your farm needs to hedge for about 100,000 bushels of wheat for next year. Contract size of corn futures is 100 bushels per contract. Come up with a hedging position including the number of futures contracts for your farm.