7. What are the primary motives for a hedger and a speculator in the derivatives market? If a wheat farmer sells wheat futures, is that hedging or speculating? Explain.

8. Explain how a manufacturer who has an ongoing need for silver as a raw material in the production process might use futures to hedge. What does the manufacturer hope to gain?

see below for other questions...

2. Refer to the table below answer the following questions? Coffee C Futures - Arabica coffee - 37,500 pounds: U.S. cents per pound COUNTRY US$ Equivalent Currency per US$ Canada ? | 1.2103 UK ? | 0.5211 If you are long 5 July 2017 contracts which you paid $1.25 for what is the amount of your gain/loss? If you are long 10 September 2017 contracts which you paid $1.30 for what is the amount of your gain/loss? If you are long 5 December 2017 contracts which you paid $1.20 for what is the amount of your gain/loss? 3. Suppose you sell nine September silver futures contracts at the settle of the day as shown in the table below. What will be your profit or loss on this contract if the price turns out to be $12.09 per ounce at expiration? Silver - 5,000 troy 99;, U.S. cents per troy oz. ___-- Sen 1163.0 1135.5 4. Suppose you purchase the November call option on orangejuice futures with a strike price of 150 at the price shown in the table below. What will be your profit or loss on this contract if the price of orange juice futures is $0.616 per pound at expiration of the option contract? Orange juice: 15,000 lbs, U.S. cents per lb. ___-__- Aug 5439 Nov Aug Sep Nov 150 8.85 10.85 14.05 0.20 2.25 5.15 2. Refer to the table below answer the following questions? Coffee C Futures - Arabica coffee - 37,500 pounds: U.S. cents per pound Open High Low Settle Jul'17 128.95 133.40 128.95 132.10 Sep'17 131.70 135.75 131.60 134.50 Dec'17 135.15 139.20 135.05 137.90 1) If you are long 5 July 2017 contracts which you paid $1.25 for what is the amount of your gain/loss? 2) If you are long 10 September 2017 contracts which you paid $1.30 for what is the amount of your gain/loss? 3) If you are long 5 December 2017 contracts which you paid $1.20 for what is the amount of Contract size = 37500 pounds Contract size 37500 Price paid Price closed #contracts Gain/(loss) Jul'17 1.250 1.321 5 13312.5 37500*5(1.321-1.250) Sep'17 1.300 1.345 10 16875.0 37500*10(1.345-1.30) Dec'17 1.200 1.379 5 33562.5 37500*5(1.379-1.200) 3. Suppose you sell nine September silver futures contracts at the settle of the day as shown in the table below. What will be your profit or loss on this contract if the price turns out to be $12.09 per ounce at expiration? Silver - 5,000 troy oz, U.S. cents per troy oz. Open High Low Settle Sep 1163.0 1163.0 1135.5 1140.5 Since you sold contracts, you have a short position and thus incur a loss when the price rises. Profit = 9 5,000 ($11.405 - $12.09) = -$30,825 (loss) 4. Suppose you purchase the November call option on orange juice futures with a strike price of 150 at the price shown in the table below. What will be your profit or loss on this contract if the price of orange juice futures is $0.616 per pound at expiration of the option contract? Orange juice: 15,000 lbs, U.S. cents per lb. Calls 150 155 Aug 8.85 4.75 Sep 10.85 7.75 Puts Nov 14.05 11.45 Aug 0.20 1.10 sep 2.25 4.35 Nov 5.15 7.55 The call will be out of the money at expiration. Loss = initial cost of contract = 15,000 (14.05/100) = $2,107.50 7. What are the primary motives for a hedger and a speculator in the derivatives market? If a wheat farmer sells wheat futures, is that hedging or speculating? Explain. The key is whether or not the contracting party has an existing position in the underlying asset. The farmer can be both a hedger and a speculator depending upon the quantity of wheat produced versus the quantity of wheat futures sold. Good students will recognize that hedgers contract in order to reduce risk while speculators seek risk with the expectation of earning sizeable returns. 8. Explain how a manufacturer who has an ongoing need for silver as a raw material in the production process might use futures to hedge. What does the manufacturer hope to gain? The manufacturer needs to acquire silver so will purchase silver futures to offset higher production costs should silver prices rise in the spot commodity market. Since there is an ongoing need, it is likely the manufacturer will maintain a continuous position in the silver futures market. The firm in this case hopes to insulate itself from fluctuations in the price of silver, thereby maintaining a more predictable stream of production cost cash outflows. 2. Refer to the table below answer the following questions? Coffee C Futures - Arabica coffee - 37,500 pounds: U.S. cents per pound Open High Low Settle Jul'17 128.95 133.40 128.95 132.10 Sep'17 131.70 135.75 131.60 134.50 Dec'17 135.15 139.20 135.05 137.90 1) If you are long 5 July 2017 contracts which you paid $1.25 for what is the amount of your gain/loss? 2) If you are long 10 September 2017 contracts which you paid $1.30 for what is the amount of your gain/loss? 3) If you are long 5 December 2017 contracts which you paid $1.20 for what is the amount of Contract size = 37500 pounds Contract size 37500 Price paid Price closed #contracts Gain/(loss) Jul'17 1.250 1.321 5 13312.5 37500*5(1.321-1.250) Sep'17 1.300 1.345 10 16875.0 37500*10(1.345-1.30) Dec'17 1.200 1.379 5 33562.5 37500*5(1.379-1.200) 3. Suppose you sell nine September silver futures contracts at the settle of the day as shown in the table below. What will be your profit or loss on this contract if the price turns out to be $12.09 per ounce at expiration? Silver - 5,000 troy oz, U.S. cents per troy oz. Open High Low Settle Sep 1163.0 1163.0 1135.5 1140.5 Since you sold contracts, you have a short position and thus incur a loss when the price rises. Profit = 9 5,000 ($11.405 - $12.09) = -$30,825 (loss) 4. Suppose you purchase the November call option on orange juice futures with a strike price of 150 at the price shown in the table below. What will be your profit or loss on this contract if the price of orange juice futures is $0.616 per pound at expiration of the option contract? Orange juice: 15,000 lbs, U.S. cents per lb. Calls 150 155 Aug 8.85 4.75 Sep 10.85 7.75 Puts Nov 14.05 11.45 Aug 0.20 1.10 sep 2.25 4.35 Nov 5.15 7.55 The call will be out of the money at expiration. Loss = initial cost of contract = 15,000 (14.05/100) = $2,107.50 7. What are the primary motives for a hedger and a speculator in the derivatives market? If a wheat farmer sells wheat futures, is that hedging or speculating? Explain. The key is whether or not the contracting party has an existing position in the underlying asset. The farmer can be both a hedger and a speculator depending upon the quantity of wheat produced versus the quantity of wheat futures sold. Good students will recognize that hedgers contract in order to reduce risk while speculators seek risk with the expectation of earning sizeable returns. 8. Explain how a manufacturer who has an ongoing need for silver as a raw material in the production process might use futures to hedge. What does the manufacturer hope to gain? The manufacturer needs to acquire silver so will purchase silver futures to offset higher production costs should silver prices rise in the spot commodity market. Since there is an ongoing need, it is likely the manufacturer will maintain a continuous position in the silver futures market. The firm in this case hopes to insulate itself from fluctuations in the price of silver, thereby maintaining a more predictable stream of production cost cash outflows