11:03 AM Wed Feb 5 + 54%O Qs Fare 4240 Insert Draw Home View Spelling ) Immersive Reader 100% 5> Page Width Paper Color Paper Style Password Protection 2 2.It is January 31, 2020. A local wheat miller-is a large producer of Semolina Pasta Flour whose main ingredient is wheat. The demand for the Semolina Pasta Flour is seasonal with the large demand occurring mid-June through the end of August. Production schedules require the accusation of 50,000 bushels of wheat in late May to meet the summer season demand. The management of the mill is concerned about the possibility that a rise in the price of wheat between now and end of May could hurt profit margin. Wheat must be acquired at a price of $4.50 per bushel or less to ensure profitability. On January 31, 2020, the July 2020 wheat futures contract (5,000 bushels) is selling for 4.35 per bushel. The standard deviation of the change in spot price is 0.60. The standard deviation of the change in futures price is 0.40. The correlation between the change in futures price and the change in spot-price is 0.80. A.Indicate whether the risk manager of the mill should take a long or short futures position to hedge price risk. Why? B.Determine the optimal hedge ratio, and determine how many contracts the mill must trade.If the standard deviation of the- change in futures price doubles, what would happen to the number of contracts? C.Determine the hedge effectiveness and comment-on this effectiveness. Determine-and discuss the effects of a 20% increase in-the correlation between the change in futures price and the change in spot price, p, on the hedge effectiveness. Suppose the miller follows your hedging recommendations-in (a) and (b). On May 31st, the spot price is $4.40 per bushel and the July futures price is $4.50 per bushel. What is the net (effective price paid by the mill? What is the total gain or loss from the futures contracts? A farmer purchased 80 cattle on January 25th and these cattle will be fed until the end of July. Each of the animals will weigh about 1,000 lbs when sold in 6 months. The price of the CME August live cattle futures on January 25th is $1.05 per Ib and the cash price is $1.15 per lb. (a) The farmer is concerned that beef prices may drop. What position should the farmer take in the futures market on January 25th? (b) How many contracts should the farmer purchase for a full hedge, given one CME live cattle contract is 40,000 lbs? 11:03 AM Wed Feb 5 + 54%O Qs Fare 4240 Insert Draw Home View Spelling ) Immersive Reader 100% 5> Page Width Paper Color Paper Style Password Protection 2 2.It is January 31, 2020. A local wheat miller-is a large producer of Semolina Pasta Flour whose main ingredient is wheat. The demand for the Semolina Pasta Flour is seasonal with the large demand occurring mid-June through the end of August. Production schedules require the accusation of 50,000 bushels of wheat in late May to meet the summer season demand. The management of the mill is concerned about the possibility that a rise in the price of wheat between now and end of May could hurt profit margin. Wheat must be acquired at a price of $4.50 per bushel or less to ensure profitability. On January 31, 2020, the July 2020 wheat futures contract (5,000 bushels) is selling for 4.35 per bushel. The standard deviation of the change in spot price is 0.60. The standard deviation of the change in futures price is 0.40. The correlation between the change in futures price and the change in spot-price is 0.80. A.Indicate whether the risk manager of the mill should take a long or short futures position to hedge price risk. Why? B.Determine the optimal hedge ratio, and determine how many contracts the mill must trade.If the standard deviation of the- change in futures price doubles, what would happen to the number of contracts? C.Determine the hedge effectiveness and comment-on this effectiveness. Determine-and discuss the effects of a 20% increase in-the correlation between the change in futures price and the change in spot price, p, on the hedge effectiveness. Suppose the miller follows your hedging recommendations-in (a) and (b). On May 31st, the spot price is $4.40 per bushel and the July futures price is $4.50 per bushel. What is the net (effective price paid by the mill? What is the total gain or loss from the futures contracts? A farmer purchased 80 cattle on January 25th and these cattle will be fed until the end of July. Each of the animals will weigh about 1,000 lbs when sold in 6 months. The price of the CME August live cattle futures on January 25th is $1.05 per Ib and the cash price is $1.15 per lb. (a) The farmer is concerned that beef prices may drop. What position should the farmer take in the futures market on January 25th? (b) How many contracts should the farmer purchase for a full hedge, given one CME live cattle contract is 40,000 lbs
