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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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