Question
Futures contract specifications for gold and lean hogs are shown below. Use the table of futures market data dated June 27, 2015 to answer questions
Futures contract specifications for gold and lean hogs are shown below. Use the table of futures market data dated June 27, 2015 to answer questions 1 and 2 below.
| OPEN | HIGH | LOW | SETTLE |
Gold 100 troy ounces; Dollars per ounce | ||||
July 2015 | 1571.40 | 1581.00 | 1563.50 | 1577.60 |
Aug | 1572.60 | 1584.60 | 1563.10 | 1578.40 |
Oct | 1574.50 | 1584.30 | 1566.00 | 1580.60 |
Dec | 1576.50 | 1585.90 | 1568.50 | 1582.70 |
Lean Hogs 40,000 pounds; Cents per pound | ||||
July 2015 | 94.55 | 96.20 | 94.40 | 95.57 |
Aug | 89.80 | 92.00 | 89.70 | 91.70 |
Oct | 79.85 | 81.30 | 79.85 | 81.05 |
Dec | 77.55 | 78.35 | 77.55 | 78.30 |
2. Suppose today is June 27, 2015 and the Dillons Grocery Store company is projecting its ham needs for the Thanksgiving holiday. The company would like to lock in its inventory cost and usually takes shipment of hams on the last day of October. The company anticipates needing 1.2 million pounds of ham for the season. The lean hog contract is the only possibility for hedging.
a) What contract month and position should the company take? (Be sure to consider the last trading day for each contract listed on the Chicago Mercantile Exchange)
b) What price are they effectively locking in based on the SETTLE price of the day?
c) Suppose lean hog futures are trading at $75.40 per pound on October 31. What is the profit or loss on the futures position?
d) Explain how the futures position has reduced exposure to price risk in the ham market.
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