Question
Consider a large Australian cotton farmer who has just planted her crop. Once grown, she plans to export her production to China. (a) Explain how
Consider a large Australian cotton farmer who has just planted her crop. Once grown, she plans to export her production to China.
(a) Explain how the following scenarios can affect her revenue:
(i) A decrease in U.S. production (the U.S. is a large exporter of cotton to China)
(ii) A depreciation in the USD/AUD exchange rate(iii) An economic recession in China
(b) Suppose the Australian cotton farmer goes short on a cotton no. 2 futures contract on the ICE exchange. Go to theice.com and look up the contract. What is the contract size? Is the contract settled with physical delivery or cash settlement?
(c) Do you think she'll buy back the same futures contract prior to expiry? Why/why not?
(d) Which of the scenarios in (a) will no longer affect her now that she's gone short?
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