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- 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.Minetech Resources Berhad anticipates the need to purchase 80,000 bushels of soybeans in six months to use in their products. The current cash price for soybeans is RM5.50 a bushel. A six-month futures contract for soybeans can be purchased at RM5.53. Show all your working steps. i)Explain why Minetech Resources Berhad might need to purchase futures contracts to hedge their position. ii)To completely hedge their exposure, how many contracts will they need to purchase? Soybeans trade in 5,000-bushel contracts. iii)If the cash price of soybeans ends up at RM5.75 per bushel after six months, by how much will the actual cost of 80,000 bushels of soybeans have gone up? iv)After the futures contracts are closed outsold at RM5.75, what will be the gain on the futures contracts? v)Considering the answers to parts (iii) and (iv), what is their net position?Rising Sun has an inventory of about 950,000 pounds of coffee, valued at $ 0.57 per pound. He fears that the price of coffee will fall in the short run, and wants to protect the value of its inventory. There is a coffee futures contract at the New York Board of Trade. Each contract is for 37,500 pounds of coffee. Coffee futures price with three months expiration is $ 0.58 per pound. Selling futures contracts provides current inventory price protection where; a). 25 futures contracts covers 937, 500 pounds b). 26 futures contracts covers 975,000 pounds Rising Sun decides to sell 25 near-term futures contracts. Over the next month, the price of coffee falls. He sells its inventory for $ 0.51 per pound. The futures price also falls , to $ 0.52. (There are two months left in the futures contract). Required; I). How did this short hedge perform? II). How much protection did selling futures contracts provide to Rising Sun?
- Assume that the price of December 2021 corn futures is $4.65/bushel in February and $4.50 in October. If spot cash price in October is $4.55, what is the farmer's total revenue? Assume he entered into 20 contracts. Each corn contract is 5000 bushels.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?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!
- BESTOIL company consumes 1,000,000 barrels of oil annually. Barrel of oil is traded at $ 49.25 in the spot market. Oil futures contracts with 1 year maturity are traded at USD 54.75 on the Chicago stock exchange. BESTOIL can borrow from banks at 7% annually and if the storage cost of oil is 1.5 USD for 1 barrel, what should the strategy of the firm be?XYZ flour company is planning to buy wheat for the next year’s production. 10,000 bushels of wheat will be purchased each quarter, on the 15th of January, April, July, and October in 2022. It wants to lock the wheat price using a futures contract, and at the same time use a swap to prepare the expenditure. The spot price of wheat today (April 15, 2021) is $3.1 per bushel, and the company enters futures contracts today. The prevailing interest rate is 1.5%, compounded continuously. Recall that each futures contract is for 5000 bushels and assume no storage cost of wheat. (a) If the company uses a prepaid swap, what is the prepayment? (b) If the company uses a plain vanilla swap for the quarterly purchase next year, what is the fixed amount?A trader buys two July futures contracts on frozen orange juice concentrate. Each contract is for the delivery of 15,000 pounds. The current futures price is 160 cents per pound, the initial margin is $6,000 per contract, and the maintenance margin is $4,500 per contract. What price change would lead to a margin call? Under what circumstances could $2,000 be withdrawn from the margin account?
- Choc Full of Good Inc., a producer of powdered hot chocolate, has just received a large order that will require the purchase of 800 metric tons of cocoa in 3 months. The current spot price of cocoa is US $3,055 per metric ton. The standard deviation of the change in spot cocoa price is 0.2. Mr. Dulce, the CFO of Choc Full, is considering a minimum-variance hedge of this future cocoa purchase using the three-month cocoa futures contract. The contract size is 10 metric tons. The standard deviation of the change in cocoa futures price is 0.25. The covariance between the change in the spot and futures cocoa price is 0.035. The annually compounded interest rate faced by the company is 5%, the three-month storage cost is $2.5 per metric ton, and the convenience yield is $0.5 per metric ton. a. What is the futures price per metric ton of cocoa? b. Should the company long or short cocoa futures?NewBank decides to invest $45 million in 30-day T-bills. The T-bills are currently trading at $4,986.70 (including commissions) for a $5,000 face value instrument. What does the balance sheet look like?Suppose that it is january 15 now. A copper fabricator knows it will require 100,000 pounds of copper on May 15 to meet a certain contract. So he takes a long position in the future contract. At that time the spot price of copper is 140 cents per pound and the May futures price is 120 cents per pound. Each contract is for the delivery of 25,000 pounds of copper. If the cost of copper on May 15 is 125 cents per pound, what is the effective price this copper fabricator pays per pound? a. Around 125 cents b. Around 105 cents c. Around 140 cents d. Around 120 cents e. Around 115 cents