AGEC $314$: Marketing Food and Agriculture Products

Homework $5(51$ points$)$

Question $1(5$ points$)$: Fill in the blanks:

Basis $=\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_-\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

$->$ Cash Price $=\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_+\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Expected price from hedging $=\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_+\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Realized $($net$)$ price from hedging $=\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_+\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

OR $=\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_+\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Question $2(4$ points$)$: Stronger versus weaker basis

A stronger basis means that the local cash price is $($relatively$)$ stronger. The realized price is

above the expected price. $($Insert $$helps$$ or $$hurts$$ below$)$

Stronger basis $\_\_\_\_\_\_\_\_\_\_\_\_$ the short hedger.

Stronger basis $\_\_\_\_\_\_\_\_\_\_\_\_$ the long hedger.

A weaker basis means that the local cash price is $($relatively$)$ weaker. The realized price is

below the expected price.

Weaker basis $\_\_\_\_\_\_\_\_\_\_\_\_$ the short hedger.

Weaker basis $\_\_\_\_\_\_\_\_\_\_\_\_$ the long hedger.

Question $3(6\mathrm{.}5$ points$)$: Hedge

October $15$th: A producer plans to sell wheat in early July; currently, July wheat futures are

trading at $6806.$ The expected basis is $$0\mathrm{.}60$ under.

$$ Does the producer have a long or short cash position? $\_\_\_\_\_\_\_\_\_\_\_$

$$ Does the producer have a long or short futures position? $\_\_\_\_\_\_\_\_\_\_\_$

$$ To hedge: The producer will $\_\_\_\_\_\_\_\_\_\_\_($buy$/$sell$)$ July wheat futures at $6806$

per bushel.

$$ What is the expected cash price? $\_\_\_\_\_\_\_\_\_\_\_$

July $1$st:

$$ The producer must $\_\_\_\_\_\_\_\_\_\_\_($buy$/$sell$)$ wheat locally in the cash market at $5622$

per bushel.

$$ To offset their future position, they must $\_\_\_\_\_\_\_\_\_\_\_($buy$/$sell$)$ July futures at

$5994$ per bushel.

$$ What is the actual basis? $\_\_\_\_\_\_\_\_\_\_\_$

o Was the basis stronger, weaker, or the same as expected? $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

$$ What is the realized price for the producer?

o Method $1$:

o Method $2$:

o The hedge resulted in a realized price of $\_\_\_\_\_\_\_\_\_\_\_.$

Question $4(6$ points$)$: Hedge

January $20$th: Miller needs to buy wheat in late April. Currently, the May wheat futures are

trading at $$6\mathrm{.}67.$ The expected basis is $-$$$0\mathrm{.}30.$

$$ Does the miller have a long or short cash position? $\_\_\_\_\_\_\_\_\_\_\_$

$$ Does the miller have a long or short futures position? $\_\_\_\_\_\_\_\_\_\_\_$

$$ To hedge: The miller will $\_\_\_\_\_\_\_\_\_\_\_($buy$/$sell$)$ May wheat futures at $$6\mathrm{.}67/$bu$.$

$$ What is the expected price? $\_\_\_\_\_\_\_\_\_\_\_$

April $30$th:

$$ The miller must $\_\_\_\_\_\_\_\_\_\_\_($buy$/$sell$)$ wheat locally in the cash market at $$7\mathrm{.}89/$bu$.$

$$ To offset their future position, they must $\_\_\_\_\_\_\_\_\_\_\_($buy$/$sell$)$ May futures at

$$8\mathrm{.}04/$bu$.$

$$ What is the actual basis? $\_\_\_\_\_\_\_\_\_\_\_$

$$ What is the realized price for the producer?

o Method $1$:

o Method $2$:

o The hedge resulted in a realized price of $\_\_\_\_\_\_\_\_\_\_\_.$

Question $5(5\mathrm{.}5$ points$)$: Hedge

May $20$th: Producer plans to sell corn in early November. Currently the December corn

futures are trading at $$4\mathrm{.}33.$ The expected basis is $-$$$0\mathrm{.}36.$

$$ Does the producer have a long or short cash position? $\_\_\_\_\_\_\_\_\_\_\_$

$$ To hedge: The producer will $\_\_\_\_\_\_\_\_\_\_\_($buy$/$sell$)$ Dec corn futures at $$4\mathrm{.}33/$bu$.$

$$ What is the expected price? $\_\_\_\_\_\_\_\_\_\_\_$

Nov. $10$th:

$$ The producer must $\_\_\_\_\_\_\_\_\_\_\_($buy$/$sell$)$ corn locally in the cash market at

$$4\mathrm{.}18/$bu$.$

$$ To offset their future position, they must $\_\_\_\_\_\_\_\_\_\_\_($buy$/$sell$)$ Dec futures at

$$4\mathrm{.}67/$bu$.$

$$ What is the actual basis? $\_\_\_\_\_\_\_\_\_\_\_$

$$ What is the realized price for the producer?

o Method $1$:

o Method $2$:

o The hedge resulted in a realized price of $\_\_\_\_\_\_\_\_\_\_\_.$

Question $6(6$ points$)$: Hedge

March $15$th: A packer needs to buy Live Cattle in early June. Currently the June Live Cattle

$($LC$)$ futures are trading at $$175\mathrm{.}650/$cwt$.$ The expected basis is $$1\mathrm{.}50/$cwt$.$

$$ Does the packer have a long or short cash position? $\_\_\_\_\_\_\_\_\_\_\_$

$$ Does the packer have a long or short futures position? $\_\_\_\_\_\_\_\_\_\_\_$

$$ To hedge: The packer will $\_\_\_\_\_\_\_\_\_\_\_($buy$/$sell$)$ June LC futures at

$$175\mathrm{.}650/$cwt$.$

$$ What is the expected price? $\_\_\_\_\_\_\_\_\_\_\_$

June $10$th:

$$ The packer must $\_\_\_\_\_\_\_\_\_\_\_($buy$/$sell$)$ cattle locally in the cash market at

$$185\mathrm{.}025/$cwt$.$

$$ To offset their future position, they must $\_\_\_\_\_\_\_\_\_\_\_($buy$/$sell$)$ June futures at

$$183\mathrm{.}00/$cwt$.$

$$ What is the actual basis? $\_\_\_\_\_\_\_\_\_\_\_$

$$ What is the realized price for the producer?

o Method $1$:

o Method $2$:

o The hedge resulted in a realized price of $\_\_\_\_\_\_\_\_\_\_\_.$

Question $7(7$ points$)$: Volume$/$Open Interest Calculation.

Fill in the numbers for Volume and Open Interest in the following table.

Day $1$

Volume

Open Interest

Trader A $($NS$)$ sells $2$ contracts to Trader B $($NB$)$

Trader C $($NS$)$ sells $2$ contracts to Trader D $($NB$)$

Trader H $($NB$)$ buys $2$ contracts from Trader A $($NS$)$

Trader D $($LL$)$ sells $1$ contract to Trader G $($NB$)$

Trader C $($SC$)$ buys $1$ contract from Trader B $($LL$)$

Trader H $($LL$)$ sells $1$ contract to Trader M $($NB$)$

End of Day $1$

Question $8(11$ points$)$: Volume$/$Open Interest

Fill in the numbers for Volume and Open Interest in the following