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6. What are credit risk and basis risk in the context of Futures contracts? Why credit risk is less pronounced for Futures Contracts as compared
6. What are credit risk and basis risk in the context of Futures contracts? Why credit risk is less pronounced for Futures Contracts as compared to private Forward Contracts? A cattle rancher plans to sell a pen of feeder cattle in March based on the spot prices at that time. The estimated sale is to the tune of 50,000 pounds. The current spot price is $150 for a lot of 50,000 pounds. A futures contract for March is available for a price of $150 per contract. The contract size is 50,000 pounds. If the rancher hedges his exposure through the futures contract, how many contracts will he need? What price will he effectively receive if the spot price in March is $0.0028 per pound? What if the spot price in March is $0.0032 per pound? Assume he is able to sell all 50,000 pounds. (10 + 5 = 15 marks)
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