2. (Three parts) Determine Net Effective price for Part A. Determine Net Effective price for Part B. And, explain if your hedge saved you money as well as mitigated extreme risk? Basic Problem: Assume you are a cattle feeder and decide the feeding spread is attractive. Therefore you want to hedge your anticipated corn purchases (over the next six months) and hedge your cattle sale in the seventh month. Assume today is January 15, 2022. Assume all futures contracts "deliver" or "expire" on the 15th of the stated delivery month. This requires a two-part hedge: buying corn futures and selling cattle futures. A. Therefore, you buy corn futures for: 2 months (from today) delivery (use ZCH2 with a 03/15/2022 expiry), and 4 months (from today) delivery (use ZCK2 with a 05/15/2022 expiry), and 6 months (from today) delivery (use ZCN2 with a 07/15/2022 expiry). Assume your local basis remains constant for all months over the entire hedge period at "10 under"/bu. Recall, you don't pay storage or interest on corn until you take delivery. Use the current CMEgroup corn futures prices for each of the three hedge months and record the starting prices for each delivery month. (note: "current" means the prices at the time you answer this question.) Answer this question: What is the Net Effective Purchase Price per bushel for the corn you need in each of March, May, and July 2022? B. To hedge your anticipated cattle sales, you sell cattle futures for delivery in 7 months. For purposes of this exercise, assume the starting futures price is 110% of the current August 2022 Cattle Futures price (rounded to the nearest.01) found on CMEgroup.com. You will need to find the price at the time you complete this question and multiply that price by 110%. Then round to the nearest 0.01. For example, assume ZLEQ2 is trading 136.725. 110% = 1.1 136.725 - 150.3975. Rounding 150.3975 to the nearest 0.01 renders" 150.40 I would use 150.40/cwt as my starting price for August Cattle Futures For example, assume ZLEQZ is trading 136.725. 110% = 1.1*136.725 = 150.3975. Rounding 150.3975 to the nearest 0.01 renders" 150.40 I would use 150.40/cwt as my starting price for August Cattle Futures. Again - you need to determine your starting price from the futures prices at the time you work on this problem. Assume your local Cattle basis declines from $1 under to $1.50 under (at the time you unwind your hedge and close your futures position). Further assume, at the time you unwind your hedge, the price of ZLEQ2 has risen 5% from your sale price calculated above) Recall: you sell your cattle in the local market at the futures price that exists at the end of the hedge minus the basis that exists at the end of the hedge. Answer this question: What is the Net Effective Sales Price per cwt for your cattle? C. Did your hedge save you money as well as mitigate extreme risk? Explain. 2. (Three parts) Determine Net Effective price for Part A. Determine Net Effective price for Part B. And, explain if your hedge saved you money as well as mitigated extreme risk? Basic Problem: Assume you are a cattle feeder and decide the feeding spread is attractive. Therefore you want to hedge your anticipated corn purchases (over the next six months) and hedge your cattle sale in the seventh month. Assume today is January 15, 2022. Assume all futures contracts "deliver" or "expire" on the 15th of the stated delivery month. This requires a two-part hedge: buying corn futures and selling cattle futures. A. Therefore, you buy corn futures for: 2 months (from today) delivery (use ZCH2 with a 03/15/2022 expiry), and 4 months (from today) delivery (use ZCK2 with a 05/15/2022 expiry), and 6 months (from today) delivery (use ZCN2 with a 07/15/2022 expiry). Assume your local basis remains constant for all months over the entire hedge period at "10 under"/bu. Recall, you don't pay storage or interest on corn until you take delivery. Use the current CMEgroup corn futures prices for each of the three hedge months and record the starting prices for each delivery month. (note: "current" means the prices at the time you answer this question.) Answer this question: What is the Net Effective Purchase Price per bushel for the corn you need in each of March, May, and July 2022? B. To hedge your anticipated cattle sales, you sell cattle futures for delivery in 7 months. For purposes of this exercise, assume the starting futures price is 110% of the current August 2022 Cattle Futures price (rounded to the nearest.01) found on CMEgroup.com. You will need to find the price at the time you complete this question and multiply that price by 110%. Then round to the nearest 0.01. For example, assume ZLEQ2 is trading 136.725. 110% = 1.1 136.725 - 150.3975. Rounding 150.3975 to the nearest 0.01 renders" 150.40 I would use 150.40/cwt as my starting price for August Cattle Futures For example, assume ZLEQZ is trading 136.725. 110% = 1.1*136.725 = 150.3975. Rounding 150.3975 to the nearest 0.01 renders" 150.40 I would use 150.40/cwt as my starting price for August Cattle Futures. Again - you need to determine your starting price from the futures prices at the time you work on this problem. Assume your local Cattle basis declines from $1 under to $1.50 under (at the time you unwind your hedge and close your futures position). Further assume, at the time you unwind your hedge, the price of ZLEQ2 has risen 5% from your sale price calculated above) Recall: you sell your cattle in the local market at the futures price that exists at the end of the hedge minus the basis that exists at the end of the hedge. Answer this question: What is the Net Effective Sales Price per cwt for your cattle? C. Did your hedge save you money as well as mitigate extreme risk? Explain
