Using the same begging portion of the above problem --A cotton buyer will be making a purchase of cotton on March 1. The buyer recognizes the potential price risk in the market and chooses to h purchase without over hedging. The appropriate futures contract is trading at $0.80/pound. His ex -$0.03/pound. Now consider: On March 1, the cotton buyer purchases 265,000 pounds of cotton in the cash market at a price of appropriate futures contract is trading at $0.72/pound.

Using the same begging portion of the above problem --A cotton buyer will be making a purchase of cotton on March 1. The buyer recognizes the potential price risk in the market and chooses to h purchase without over hedging. The appropriate futures contract is trading at $0.80/pound. His ex -$0.03/pound. Now consider: On March 1, the cotton buyer purchases 265,000 pounds of cotton in the cash market at a price of appropriate futures contract is trading at $0.72/pound.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

A trader enters into a short cotton forward contract when the forwards price is 50 cents per pound. The contract is for the delivery of 50000 pounds. How much does the trader gain or lose if the cotton price at the end of the contract is? 20 cents per pound 30 cents per pound In what price forward will be at the money, in the money, and out-the money?
Consider a farmer who plans to sell 6,000 bushels of corns on date T. The date-T spot price of corn is normally distributed with mean $500 per bushel and standard deviation $50 per bushel. To hedge the price risk, the farmer considers shorting corn futures with delivery on date T. The futures price is $480 per bushel, and one contract is to deliver 5,000 bushels. In addition, the farmer can take only integer number of contracts (i.e, a fraction of contract such as 0.1 is NOT allowed). (a) How may contracts does the farmer need to take? (b) What is the mean of the total revenue? (c) What is the standard deviation of the total revenue?
The futures price of a commodity such as wheat is $2.50 a bushel. Futures contracts are for 10,000 bushels, and the margin requirement is $2,500 a contract. The maintenance market requirement is $1,000. A speculator expects the price of the commodity to rise and enters into a contract to buy wheat. a. How much must the speculator initially remit? b. If the futures price rises to $2.60, what is the profit and return on the position? c. If the futures price declines to $2.47, what is the loss on the position?
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
Fred enters into a futures contract to buy 10,000 pounds of cotton for $8 per pound. The initial margin is 5% of contract value, and the maintenance margin is 75% of the initial margin. What price (per pound) of cotton futures will trigger a margin call? ______. What amount would Fred’s broker have to post in response to this margin call? ______.
Consider a hypothetical futures contract where the current price is $ 212. The initial margin requirement is $ 10 and the maintenance margin requirement is $ 8. You enter into long 20 contracts and meet all margin requirements, but do not withdraw any excess margin. B. Complete the table below and explain all deposited funds. Suppose the contract was purchased at the settlement price of that day, so there is no gain or loss at current market prices on the day of purchase. C. What is your total profit or loss by the end of Day 6?
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?
A com processor will purchase 3 million bu. of corn in one month and hedges against price changes using the November contract. You know from historical data (tailing the hedge data) o,-0.0333, o,-0.0200, and p0.935. If needed, the futures price is $ 9.76 per bushel and the spot price is $ 9.4. How many contracts should be hedged?
As a financial analyst at Deutsche Bank, NY, you are helping your client with futures hedging. Your client enters into a long position in futures contract to buy 5,000 bushels of wheat for $6.50 per bushel. The initial margin is $3,000 and the maintenance margin is $2,000. Your client will be allowed to withdraw any balance in the margin account in excess of the initial margin and the company will get a margin call if the balance is going below the maintenance margin. a. Will the trader get a margin call if the futures price goes to $6.14? (sample answer: Yes or No) b. What will be the price that will trigger a margin call of $2,500? C. What will be the price that will allow you to withdraw just $2,500 from the margin account? (sample answer $4.50) (sample answer:$4.50)
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?
please help with this question 10. A soybean farmer plans to sell a portion of their crop in October. To set up a short hedge, the farmer purchases a put option with a strike price of 750/bu. at a premium of 30/bushel. In October, the soybean cash price is 640/bu. and November soybean futures are trading at 655/bu. Fill in the table given here to describe the actions this farmer will take in the cash & futures exchange to hedge, the gain/loss the manufacturer will experience in these markets, and the net price that the manufacturer will receive for soybeans. Futures & Options Markets Purchase a put option Time Period Spot Market June No action Strike Price = 750/bu. Premium 30/bu. October Gain/Loss Net Price
A cheese factory wants to protect their purchase price of milk so they hedge in milk futures at a price of $19.10. Expected basis is +$0.90. On the day they exit the futures market, the futures price is $18.90 and actual basis is +$0.50. Find the net price they will pay for milk.