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Consider a situation wherein a farmer takes a short position in 6 rice future contracts is done in order to hedge against the trend of
Consider a situation wherein a farmer takes a short position in 6 rice future contracts is done in order to hedge against the trend of falling commodity prices in the current markets. Thus, the farmer is hedging against a price decline on 1,200 bushels of rice. The price of each contract is AED 12. Thus, the account of the farmer would be recorded as AED 14, 400 (AED 121,200 bushels of rice). Given that the farmer holds a short position and long-term position in the rice futures, when there is a fall in the value of the contract, an increase to the account is witnessed. Similarly, if there is an increase in the value of the futures, there will be a resultant decrease in his account. For example, on day 2, the value of the futures is 12.5, on day 3 , the value of the futures is 11 , on day 4 , the value of the futures is 13.5, on day 5 , the value of the futures is 10 , on day 6 , the value of the futures is 8 . You are required to calculate the following based on given format. (i) Change in value (ii) Gain/Loss for each day (iii) Average Gain/Loss (iv) Account balance at the last (6th) day. Consider a situation wherein a farmer takes a short position in 6 rice future contracts is done in order to hedge against the trend of falling commodity prices in the current markets. Thus, the farmer is hedging against a price decline on 1,200 bushels of rice. The price of each contract is AED 12. Thus, the account of the farmer would be recorded as AED 14, 400 (AED 121,200 bushels of rice). Given that the farmer holds a short position and long-term position in the rice futures, when there is a fall in the value of the contract, an increase to the account is witnessed. Similarly, if there is an increase in the value of the futures, there will be a resultant decrease in his account. For example, on day 2, the value of the futures is 12.5, on day 3 , the value of the futures is 11 , on day 4 , the value of the futures is 13.5, on day 5 , the value of the futures is 10 , on day 6 , the value of the futures is 8 . You are required to calculate the following based on given format. (i) Change in value (ii) Gain/Loss for each day (iii) Average Gain/Loss (iv) Account balance at the last (6th) day
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