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. Your farm is producing wheat. You worry that the price of wheat is falling every year and decided to do some hedging in thefutures market. Unfortunately, the market does not currently have futures on wheat. Instead, you found out that there is a liquidcorn futures market and historically wheat and corn price movements are positively correlated. Corn prices are movingapproximately 90% of wheat price movements (if the wheat price changes by t10%, the corn price will change about+9% (- 10% * 90%), Todays per bushel wheat price is $5.2 and per bushel com price is $3.5. Your farm needs to hedge forabout 100,000 bushels of wheat for next year. Contract size of corn futures is 100 bushels per contract. Come up with a hedgingposition including the number of futures contracts for your farm.WheatCorn

Answer: Number of future contracts is 1,338 Given information: Correlation is 0.90 Price or wheat is…

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 t10%, the corn price will change about +9% (- 10% * 90%), Todays per bushel wheat price is $5.2 and per bushel com 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. Wheat Corn

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 t10%, the corn price will change about +9% (- 10% * 90%), Todays per bushel wheat price is $5.2 and per bushel com 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. Wheat Corn

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter21: Risk Management

Section: Chapter Questions

Problem 4P

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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 Question
Suppose a farmer is expecting that her crop of oranges will be ready for harvest and sale as 150,000 pounds of orange juice in 3 months time. Suppose each orange juice futures contract is for 15,000 pounds of orange juice, and the current futures price is F0 = 118.65 cents-per-pound. The volatility, i.e. the standard deviation, of the prices of orange juice and grape fruit juice is 20% and 25%, respectively, and the correlation coefficient is 0.70. What is the approximate number of contracts she should purchase to minimize the variance of her payoff?
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
There is a 30% chance that the economy will be good next year and a 70% chance that it will be bad. If the economy is good, there is a 60% chance of a bull market, a 30% chance of a normal market, and a 10% chance of a bear market. If the economy is bad, there is a 15% chance of a bull market, 30% chance of a normal market, and a 55% chance of a bear market.What is the probability of having a good economy and a bull market? 0.30 0.45 0.18 0.90
Suppose that the price of corn is risky, with a beta of .5. The monthly storage cost is $.03 per bushel, and the current spot price is $5.50, with an expected spot price in three months of $5.88. If the expected rate of return on the market is 0.9% per month, with a risk-free rate of 0.5% per month, would you store corn for three months?
Suppose that standard deviation of monthly changes in spot prices of live cattle is 1.2 cents per pound of live cattle, and the standard deviation of monthly changes in futures prices or the closing contracts is 1.4 cents per pound of live cattle. The coefficient of correlation between the two changes is 0.8. If a food processing company wants to hedge 500,000 pounds of live cattle and the size of the relevant futures contract on live cattle is 45,000 pounds then (1) What strategy should a beef producer (user of live cattle) follow? What does it mean? (2) What is the optimal number of futures contract with no tailing of the hedge? (3) What is the optimal number of future contract with tailing of the hedge?
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?
as a soybean buyer, you are concerned about soy prices. Currently, they are at $60 per bushel .Therefore, you enter into the appropriate futures contract at the current spot price. What is your profit or loss, if six months later, soybean is selling at the spot market for 51 bushell? why?
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!
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?