None Ms. Kendall is the chief financial officer for Cincinnati Developers. In January, she estimates that the company will needto purchase 6,000,000 square feet of plywood in June to meet its material needs on one of its office construction jobs.Ms. Hunter is confident that plywood prices will be decreasing in the future but does not want to assume the price risk ifplywood prices were to increase. Suppose there is a June plywood futures call with X = $0.20/sq. ft. (contract size is5,000 square feet), selling at C = $0.02, and expiring at the same time as the June underlying plywood futurescontract. Explain how Ms. Kendall could cap the company's June plywood costs with a position in the June plywoodfutures call. Evaluate the cap by showing in a table Ms. Kendall's hedged costs at the plywood futures option'sexpiration date by buying the plywood on the spot market and closing the futures call options at their intrinsic value.Evaluate at possible spot prices of 0.12/sq. ft., 0.14/sq. ft., 0.16/sq. ft., 0.18/sq. ft., 0.20/sq. ft., 0.22/sq. ft., 0.24/sq. ft., and 0.26/sq. ft..

Let's create a table to evaluate Ms. Kendall's hedged costs at different possible spot prices of…

Answered: Ms. Kendall is the chief financial…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter21: Risk Management

Section: Chapter Questions

Problem 2P

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It is September 10 and Mr. James is making final estimates of this year’s wheat crop. His production is turningout to be much better than anticipated. This causes concern because if his production is better than expected, otherfarmers must be experiencing the same situation. The current spot price is $2.25 per bushel, and the Octoberwheat futures (5,000 bushels per contract) price is $2.52 per bushel. At the current spot price, Mr James wouldjust break even with his anticipated 60,000 bushels. His wheat will not be ready until October.a) What can Mr James do to ensure his profitability? Is this a long or a short hedge? Why? b) What is the essential feature of a forward contract that makes a futures contract a type of forward contract?
It is September 10 and Mr. James is making final estimates of this year’s wheat crop. His production is turning out to be much better than anticipated. This causes concern because if his production is better than expected, other farmers must be experiencing the same situation. The current spot price is $2.25 per bushel, and the October wheat futures (5,000 bushels per contract) price is $2.52 per bushel. At the current spot price, Mr James would just break even with his anticipated 60,000 bushels. His wheat will not be ready until October. a) At harvest time in October, Mr James’ concerns are realized in that the cash price has dropped to $1.70 per bushel. Compute Mr James’ payoff on wheat futures, assuming he hedged his anticipated production and his final yield was 60,000 bushels.
It is September 10 and Mr. James is making final estimates of this year’s wheat crop. His production is turning out to be much better than anticipated. This causes concern because if his production is better than expected, other farmers must be experiencing the same situation. The current spot price is $2.25 per bushel, and the October wheat futures (5,000 bushels per contract) price is $2.52 per bushel. At the current spot price, Mr James would just break even with his anticipated 60,000 bushels. His wheat will not be ready until October.a) What can Mr James do to ensure his profitability? Is this a long or a short hedge? Why? b) At harvest time in October, Mr James’ concerns are realized in that the cash price has dropped to $1.70 per bushel. Compute Mr James’ payoff on wheat futures, assuming he hedged his anticipated production and his final yield was 60,000 bushels.c) Suppose Mr James’ production turned out to be only 50,000 bushels. Compute his net revenue and compare it with…
You are the buyer for a cereal company and you must buy 80,000 bushels of corn next month. The futures contracts on corn are based on 5,000 bushels and are currently quoted at 415′0 cents per bushel for delivery next month. If you want to hedge your cost, you should _____ contracts at a cost of _____ per contract.
A refinery has 250 tons of CPO on hand. This will be held over the following three months. He aims to hedge against a drop in CPO prices, which might result in losses since his production price is linked to CPO prices. The following information is available to him. Current inventory = 250 tons Spot price = $31100 per ton Interest rate = 6% per year Annual storage cost = $ 44 per ton (4% per annum) 3-month CPO futures = $ 1126.53 per ton a. How can the refiner protect oneself from declining CPO prices by using the CPO futures contract?
Trips Logistics, a third-party logistics firm that provides warehousing and other logistics services, is facing a decision regarding the amount of space to lease for the upcoming two-year period. 1,000 square feet of warehouse space is required for every 1,000 units of demand, and the current demand at Trips Logistics is for 100,000 units per year. The manager forecasts that from one year to the next, demand may go up 5 percent with a probability of 0.5 or go down by 5 percent by a probability of 0.5. The probabilities of the two outcomes are independent. The manager can sign a two year lease at a price of 0.8 dollar per square feet per year or obtain the warehouse space from sport market with 1.3 dollar per square feet per year. From the current year to the next year, spot prices for warehouse space may go up by 9% with probability 0.5 or go down by 9% with probability 0.5. The probabilities of the two outcomes are independent. The manager believes that the process of…
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?
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
KNS estimates that if he purchases the new equipment and lowers his price to P44.55 per item, his volume will increase to about 4,700 units per month. Based on the local market, that is the largest volume he can realistically expect. WHAT SHOULD KNS DO?
Let’s assume we are a heating oil delivery service company that sells 80,000 gallons of heating oil every month its clients. The firm wants to hedge its position buy entering into a contract to buy its heating oil at the end of each month for the following month. The firm has decided it only needs to hedge for the next 5 months as the demand for heating oil significantly falls off after that. What would be the swap price of the 80,000 gallons of heating oil at the end of each month for the next 5-months if the following information is true? (Risk-free rate is provided per annum with continuous compounding) Month Forward Price Risk-Free Rate 1 $ 2.999 1.50% 2 $ 3.009 1.50% 3 $ 3.039 1.60% 4 $ 3.075 1.75% 5 $ 3.105 1.75%
Eastmark Electrical Equipment Manufacturers needs to secure its supply of copper for the next year. The price of copper is extremely volatile because of huge month-to-month variation in demand. Eastmark wants to break even with a hedge against future copper prices. Currently, the market price for copper is reasonably low at $3.25 per pound or $325 (CWT). Eastmark has entered into a contract with the supplier for 500,000 pounds of copper per month starting in January at market prices. Eastmark has also entered into a futures contract with a financial institution for 500,000 pounds per month at $3.25 per pound. CWT (hundredweight) is equal to 100 pounds in the United States. a. Calculate the one month financial and the physical results if the market price of copper has risen to $4.50 per pound. b. Calculate the one month financial and the physical results if the market price of copper has fallen to $3.00 per pound.
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: 1. What is the net selling price from hedging using the PUT?

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