In January s of 2018, you took a short position on 100 Feeder Cattle futures contracts that maturesin September 2018. The maintenance margin is 60% of the contract size (- 148.05 * 100* 60%)and if your margin goes below the maintenance margin you will get a margin call. Determine thefollowing: 1) Based on futures prices in January 5. what is the market's expectation on futureprice movements of cattle spots? 2) Based on your position, are you a hodger or a speculator? 3)As of at the end of Apr 2018, is this position profitable? 4) Did you have any margin calls beforethe end of April?Futures Jaruary 5, 2018) in uS.Fed CattleFebruary 2018April 2018June 2018August 2018October 208December 2018Close122.25Change0.00108Close149.03145.55145.83Change343333315Feeder CattleJanuary 2018March 2018April 2018May 2018August 2018September 201812383114.851021173130145.483.30112.95115.08173145148.48148.052.402.18Feeder Cattle Sot PriceFER CA120an 27AJal 017Apr

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Answered: In January s of 2018, you took a short…

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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Backwardation and Contango In January 5th of 2018, you took a short postion on 100 Feeder Cattle futures contracts that mature in Septemeber 2018. The maintenance margin is 60% of the contract size (= 148.05 * 100 * 60%) and if your margin goes below the maintenance margin you will get a margin call. Determine the following: 1) Based on futures prices in January 5th, what is the market's expectation on future price movements of cattle spots? 2) Based on your position, are you a hedger or a speculator? 3) As of at the end of Apr 2018, is the position profitable? 4) Did you have any margin call before the end of April? (see attached Image)
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)
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