A farmer, Mr Donkor wants to guarantee the price at which he will sell $10$ metric tons

of maize that he expects to harvest three months hence $($say$,$ November$).$ He thinks $1\mathrm{.}5$

million cedis is a good price, $($ie $150,000$ cedis per ton$).$ A kenkey factory called

Anakunda Ghana Limited also looking to guarantee the price at which to buy maize

also thinks $1\mathrm{.}5$ million is a good price for delivery of $10$ metric tons in three months.

To use a futures contract to achieve his objective, $($that is$,$ hedge the price he will get

for his maize in November$),$ the farmer decided to approach his broker and open up the

short side of a futures contract in the Ghana Commodities Market.

For its part, the Anakunda Ghana Limited also decided to approach its broker and open a

long position in a futures contract $($also to hedge the price that it will pay for maize come

November$).$ If the initial margin requirement is $10\%,$ each will be required to pay $150,000$

cedis into their margin account. Suppose the next day $($day $2),$ the price of maize rises to

$160,000$ cedis per ton on news that The Gambia Republic is placing a large order for

Ghanaian maize at a very attractive price. Knowing that $Mr$ Donkor is an economic agent

who is a utility maximizer and therefore prefer more to less. At the new high price of maize,

$Mr.$ Donkor has a natural incentive to renege on his earlier commitment to sell November

maize at $150,000$ to Anakunda Ghana Limited. To redress this apparent complication

$($change in the terms of the original contract$),$ the clearing house comes in to handle the

issue because the change in the price of maize puts Anakunda Ghana Limited in a profit

position. Economically, both are back where they would have been had conditions backing

the terms of the contract not changed. Marking$-$to$-$market means speculators can collect

their gains even before maturity.

However, to ensure that the margin account is never negative, a maintenance margin

$($below the original margin requirement$)$ is required by the clearing house. That is$,$ at

any point in time, each is required to have a certain minimum amount of money

in their margin account.

Suppose that when the price of maize rose to $0\mathrm{.}16$ million cedis on day $2,$ the kenkey

factory takes the view that November maize price can never rise above that figure.

Realizing that it is in a profit position, the company has many options to decide on

November maize $($i$.$ e$.$ maize to be delivered in November$)$ at $0\mathrm{.}16$ million cedis per

ton. $($After all, the farmer is obliged to deliver November maize to the factory at a lower

price$).$

a$)$ On hearing that the price of November maize has gone up$,$ do you expect

Mr$.$ Donkor to renege on the original contract and why?

b$)$ If he did $($did not$),$ would he benefit from either decision and why?

c$)$ Spell out the four $(4)$ steps that the Clearing House $($Ghana Commodities

Market$)$ will always do to avoid losses on either party in the contract.

d$)$ Anakunda Ghana Limited became "cash trap" and needed immediate liquidity

support while November maize is not ready but there were buyers promising

even higher prices. What should the company do$?$

e$)$ How much and who do you expect the market to debit and credit?