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
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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) What is the essential feature of a forward contract that makes a futures contract a type of forward contract?
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- 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 $AnswerOn May 1, a soybean producer is expecting a crop of over 60,000 bushels. They would like to sell the crop soon after the October harvest. They are fairly certain that prices are heading down, so they want to lock in a price for December delivery. They decide to hedge 50% of their production. The November futures price today is $12.82. and the local forward cash for November is $12.57. Brokerage fees for each contract is $15.00 round-turn. In November, futures prices are $12.20 and cash prices are $12.27. What was the net price received per bushel for this scenario?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 grain farmer has 200,000 bushels of corn in storage as of November 1st. For various reasons this grain farmer does not wish to sell until next spring. This farmer is also concerned about the price of grain dropping between now and next spring. The basis next spring is estimated to be $.40 under. On November 1st May futures are $4.25. 1. What is the estimated price if this person hedges? 2. If this person hedges would they buy or sell contracts? 3. How many contracts would be needed to hedge the entire crop? Assume on November 1st this farmer hedges the entire crop using May futures. Next spring the CBOT contracts are offset at $4.05 and the actual corn is sold for $3.65 per bushel at the local elevator. 4 What was the actual outcome? s. What would the outcome have been without the hedge?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.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?
- 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?The standard deviation of monthly changes in the spot price of live cattle is (in cents perpound) 1.2. The standard deviation of monthly changes in the futures price of live cattle forthe closest contract is 1.4. The correlation between the futures price changes and the spotprice changes is 0.7. It is now October 15. A beef producer is committed to purchasing200,000 pounds of live cattle on November 15. The producer wants to use the December livecattle futures contracts to hedge its risk. Each contract is for the delivery of 40,000 pounds ofcattle. What strategy should the beef producer follow?The standard deviation of monthly changes in the spot price of live cattle is (in cents per pound) 1.5. The standard deviation of monthly changes in the futures price of live cattle for the closest contract is 2. The correlation between the futures price changes and the spot price changes is 0.5. It is now October 15. A beef producer is committed to purchasing 500000 pounds of live cattle on November 15. The producer wants to use the December live-cattle futures contracts to hedge its risk. Each contract is for the delivery of 40000 pounds of cattle. What strategy should the beef producer follow?
- In January 5th of 2018, you took a short position on 100 Feeder Cattle futures contracts that matures in 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 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 this position profitable? 4) Did you have any margin calls before the end of April?In January s of 2018, you took a short position on 100 Feeder Cattle futures contracts that matures in 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 the following: 1) Based on futures prices in January 5. what is the market's expectation on future price 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 before the end of April? Futures Jaruary 5, 2018) in uS. Fed Cattle February 2018 April 2018 June 2018 August 2018 October 208 December 2018 Close 122.25 Change 0.00 108 Close 149.03 145.55 145.83 Change 343 333 315 Feeder Cattle January 2018 March 2018 April 2018 May 2018 August 2018 September 2018 12383 114.85 102 1173 130 145.48 3.30 112.95 115.08 173 145 148.48 148.05 2.40 2.18 Feeder Cattle Sot Price FER CA 120 an 27 A…A farmer sells futures contracts at a price of $6.70 per bushel on 10,000 bushels of corn. The spot price of corn is $6.55 at contract expiration. What is the farmer's profit on the futures contracts?