Question
(5 marks total) For this question ignore exchange rate issues, commissions and brokerage fees, margins and margin calls, and any financing costs. Suppose you are
(5 marks total) For this question ignore exchange rate issues, commissions and brokerage fees, margins and margin calls, and any financing costs. Suppose you are a grain merchant looking to hedge the risk you face in the cash market. At the beginning of March 2022 you went long in the cash market and have 15,000 bushels of corn in storage. The cash price of corn was $5 per bushel when you went long in the cash market. At the same time, you went short in the futures market with 3 contracts for December 2022 corn (at a price of $5.45 per bushel per contract. Each contract involves 5,000 bushels). Storage costs are $0.05 per bushel per month for corn. Fast forward to the end of November 2022, and suppose the cash price of corn is $6 per bushel, while December corn is trading at $5.90 per bushel at the futures market. You now want to close your position for corn.
*Answer each sub-question and clearly indicate the sub-question (a,b,c) you are answering to. *To get credit, show your progress.
a. (1 mark) What trades do you make to close your position? b. (2 marks) What is your gain or loss in the cash market from closing your position at the end of November 2022? c. (2 marks) What is your gain or loss in the futures market from closing your position at the end of November 2022?
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