1. It is February 15. Suppose a cheese manufacturer decides to hedge against higher Class III milk prices by buying CME Class III Milk options for an anticipated purchase in early March. March Class III Milk futures are currently at $17.00/cwt. March $17.00 Class III Milk Call option is trading at a premium of $0.65/cwt. Expected local cash basis in early March is +0.05/cwt over the March futures. The manufacturer expects to buy 600,000 pounds of Class III Milk. One CME Group Class III Milk contract is 200,000 pounds -2,000 cwt. What right does the manufacturer obtain? How many options contracts does the manufacturer need? What would be the $0.65/cwt call be worth per contract if the March Class III Milk futures price fell to $15.95/cwt by March? What is the profit on the PUT option per contract? What is the expected buying price for the manufacturer using a futures contract on February 15, 2019? On March 15, the March Class III Milk futures is trading at $15.95/cwt. Suppose that manufacturer can receive $0.05/cwt basis over the March Class III Milk futures What cash market price would be realized in March. Suppose that manufacture can receive $0.05 /cwt basis over the March futures. What effective (net) buying price per cwt would the manufacturer realize for the milk considering the profit or loss on the call option and the returns from the cash sales? Would the result in (e) be different if instead, the company hedged with futures? Show vour work. If the manufacturer knew with perfect foresight what would happen to prices in March, which marketing strategy would you recommend: (i) a cash strategy, (ii) a futures strategy or (iii) CALL options strategy? Why? If the delta of the option is 0.50 and the futures hedge ratio is 0.6, how many call options would be required to offset a loss in the cash market? Calculate the nelt buying cash price for the options hedge strategy in March. Would your answer to (g) change? Why? a. b. c. d. e. f. h. 1. It is February 15. Suppose a cheese manufacturer decides to hedge against higher Class III milk prices by buying CME Class III Milk options for an anticipated purchase in early March. March Class III Milk futures are currently at $17.00/cwt. March $17.00 Class III Milk Call option is trading at a premium of $0.65/cwt. Expected local cash basis in early March is +0.05/cwt over the March futures. The manufacturer expects to buy 600,000 pounds of Class III Milk. One CME Group Class III Milk contract is 200,000 pounds -2,000 cwt. What right does the manufacturer obtain? How many options contracts does the manufacturer need? What would be the $0.65/cwt call be worth per contract if the March Class III Milk futures price fell to $15.95/cwt by March? What is the profit on the PUT option per contract? What is the expected buying price for the manufacturer using a futures contract on February 15, 2019? On March 15, the March Class III Milk futures is trading at $15.95/cwt. Suppose that manufacturer can receive $0.05/cwt basis over the March Class III Milk futures What cash market price would be realized in March. Suppose that manufacture can receive $0.05 /cwt basis over the March futures. What effective (net) buying price per cwt would the manufacturer realize for the milk considering the profit or loss on the call option and the returns from the cash sales? Would the result in (e) be different if instead, the company hedged with futures? Show vour work. If the manufacturer knew with perfect foresight what would happen to prices in March, which marketing strategy would you recommend: (i) a cash strategy, (ii) a futures strategy or (iii) CALL options strategy? Why? If the delta of the option is 0.50 and the futures hedge ratio is 0.6, how many call options would be required to offset a loss in the cash market? Calculate the nelt buying cash price for the options hedge strategy in March. Would your answer to (g) change? Why? a. b. c. d. e. f. h
