2.2 Futures Contracts (20 marks) The soybean growers have the option to use forward or futures contracts at the beginning of the season to fix the price of the crops at the end of the season. However, they are unlikely to contract to sell their total expected crop. The number of contracts undertaken depends on the grower's expectations about their crop and future prices, and how they perceive the risks for the coming months. This is also true for the demand side of the soybean trader. Even though the soybean buyer would appreciate a level of certainty so they can measure the "cost" of buying the soybean, they might not want to fully eliminate the price risks (nor that they can effectively eliminate all risks). Moreover, depending on the contracts undertaken for hedging the risks, there are costs with entering into a futures contract. The business is required to contribute an initial margin to the trade and to keep the maintenance margin during the contracting period. Additionally, brokerage commissions should also be factored into the cost. Page 2 of 7 In your report, assume that you can enter into futures contracts to create hedging strategies for the business. 1 Would you recommend a full hedge or partial hedge? Provide plan(s) to use futures to conduct hedging and justify your recommendation by projecting the potential outcomes for your hedged strategies. Your plan should be supported by numerical analysis 2. 2.2 Futures Contracts (20 marks) The soybean growers have the option to use forward or futures contracts at the beginning of the season to fix the price of the crops at the end of the season. However, they are unlikely to contract to sell their total expected crop. The number of contracts undertaken depends on the grower's expectations about their crop and future prices, and how they perceive the risks for the coming months. This is also true for the demand side of the soybean trader. Even though the soybean buyer would appreciate a level of certainty so they can measure the "cost" of buying the soybean, they might not want to fully eliminate the price risks (nor that they can effectively eliminate all risks). Moreover, depending on the contracts undertaken for hedging the risks, there are costs with entering into a futures contract. The business is required to contribute an initial margin to the trade and to keep the maintenance margin during the contracting period. Additionally, brokerage commissions should also be factored into the cost. Page 2 of 7 In your report, assume that you can enter into futures contracts to create hedging strategies for the business. 1 Would you recommend a full hedge or partial hedge? Provide plan(s) to use futures to conduct hedging and justify your recommendation by projecting the potential outcomes for your hedged strategies. Your plan should be supported by numerical analysis 2