Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

HEDGING WITH DERIVATIVES You are a grain merchant with an inventory of 2,000,000 bushels of soybeans to sell in the coming months. The price of

HEDGING WITH DERIVATIVES

You are a grain merchant with an inventory of 2,000,000 bushels of soybeans to sell in the coming months. The price of corn is high now at $11.70/bushel but there is a risk that the price may decline as we move into harvest season.

The derivatives market you decide to use to hedge is the May 2021 Soybean Futures market; its price now is $11.75/bushel. The notional amount of one futures contract is 5,000 bushels.

a. Do you buy the futures contract or sell the futures contract as a hedge?

b. How many futures contracts do you buy or sell?

c. Two months later you sell all the soybeans to a feed manufacturer and offset your futures hedge.

The price at which you sell the soybeans is $12.50/bushel. How much money in total do you receive for the sale?

The price of the May 2021 soybean futures at that time is 12.60/bushel. Has your hedge made a profit or a loss? How much?

d. When you combine the amount you received for the soybeans and the profit or loss on the futures market hedge, what is the net amount of you have received (i.e. your "effective value")?

e. Convert that effective value into the "effective price" per bushel of soybeans.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Introduction To Derivatives And Risk Management

Authors: Robert Brooks, Don M Chance

9th Edition

1133190197, 978-1133190196

More Books

Students also viewed these Finance questions

Question

What is an elementary unit?

Answered: 1 week ago