Question
A food company is planning to purchase 5,000,000 pounds of beef in six months. The company is concerned about changes in the price of beef.
A food company is planning to purchase 5,000,000 pounds of beef in six months. The company is concerned about changes in the price of beef. Your assignment is to construct a futures contract hedge to protect the companys cost. The current wholesale price of beef is 106 Cents per pound.
The livestock futures contracts are for 40,000 pounds. The futures contract quoted price is Cents per pound. The coefficient of correlation between livestock and beef is 0.93. The standard deviation of livestock and beef are 56.35 and 68.25 respectively.
The available futures contracts are This information was downloaded from CME Group website:
Month | Last (cents) | Change | Prior Settle | Open | High | Low |
Aug-18 | 106.075 | -0.3 | 106.375 | 106.85 | 107.325 | 105.775 |
Oct-18 | 108.65 | -0.975 | 109.625 | 109.9 | 110.275 | 108.3 |
Dec-18 | 112.825 | -0.875 | 113.7 | 113.775 | 114.05 | 112.4 |
Feb-19 | 116.325 | -0.2 | 116.525 | 116.5 | 116.775 | 115.35 |
Apr-19 | 117.825 | -0.425 | 118.25 | 118.45 | 118.45 | 117.125 |
Jun-19 | 110.65 | -0.5 | 111.15 | 111.175 | 111.175 | 110 |
Aug-19 | 109.675 | -0.325 | 110 | 109.7 | 110 | 108.95 |
Oct-19 | 111 | -0.6 | 111.6 | 111 | 111 | 111 |
Part 3.
Calculate the forward rates given the following zero rates.
Year | Zero rate | Forward rate |
1 | 3.5 |
|
2 | 3.75 |
|
3 | 4.5 |
|
4 | 5.0 |
|
Part 4.
Part a. Describe the Repo rate.
Part b. Describe the Fed Funds rate
Part 5.
Calculate the one and two-year zero rate from the following information.
Face value | Current price | Coupon | Maturity |
100 | 95 | 0 | 1 year |
100 | 92 | 1.5 paid every six months; 3.0 total per year. | 2 years |
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