It is now November 2021. A company anticipates that it will purchase 187,500 bushels of com in each of February 2022, April 2022, June 2022. The company has decided to use the futures contracts traded in the CME Group to hedge its risk. One contract is for the delivery of 5,000 bushels of corn. The initial margin is $1,000 per contract and the maintenance margin is $800 per contract. The company's policy is to hedge 80% of its exposure. Contracts with maturities up to 12 months into the future are considered to have sufficient liquidity to meet the company's needs. Devise a hedging strategy for the company. Assume the market prices (in cents per bushel) today and at future dates are as follows. a. What is the strategy you propose today to hedge the future exposure? (7 marks) b. What is the impact of the strategy you propose on the price the company pays for com? ( 3 marks) c. What is the initial margin requirement in November 2021 ? Is the company subject to any margin calls? (3 marks) d. Suppose today the company decides to hedge the exposure on February 2022 with futures contract on another related asset. Each futures contract is on 5,000 bushels. The standard deviation of the change in the price of com is estimated to be $0.03. The futures price of the related asset is 54.5 and the standard deviation of the change in this over the life of the hedge is 50.04. The coefficient of conelation between the spot price change and futures price change is 0.8, what is the minimum variance hedge ratio? (2 It is now November 2021. A company anticipates that it will purchase 187,500 bushels of com in each of February 2022, April 2022, June 2022. The company has decided to use the futures contracts traded in the CME Group to hedge its risk. One contract is for the delivery of 5,000 bushels of corn. The initial margin is $1,000 per contract and the maintenance margin is $800 per contract. The company's policy is to hedge 80% of its exposure. Contracts with maturities up to 12 months into the future are considered to have sufficient liquidity to meet the company's needs. Devise a hedging strategy for the company. Assume the market prices (in cents per bushel) today and at future dates are as follows. a. What is the strategy you propose today to hedge the future exposure? (7 marks) b. What is the impact of the strategy you propose on the price the company pays for com? ( 3 marks) c. What is the initial margin requirement in November 2021 ? Is the company subject to any margin calls? (3 marks) d. Suppose today the company decides to hedge the exposure on February 2022 with futures contract on another related asset. Each futures contract is on 5,000 bushels. The standard deviation of the change in the price of com is estimated to be $0.03. The futures price of the related asset is 54.5 and the standard deviation of the change in this over the life of the hedge is 50.04. The coefficient of conelation between the spot price change and futures price change is 0.8, what is the minimum variance hedge ratio? (2
