Luxury Cotton ("Luxury), an independent distributor of cotton, is planning to sell 4.0 million lbs of cotton in March 2017 at the spot price on delivery day. In order to hedge against a possible decline in cotton prices, Luxury wants to enter into a Futures contract and lock in the price. The standard deviation of the per lh is calculated 0.04 (4.096), the standard deviation of the change in the futures is 0.035 (3.5%) and the coefficient of correlation between the price of cotton and change in the futures price is 0.80. a. Looking at the Future's Contract table below, how many contracts should Luxury optimize so that 2/3 of it's exposure it's hedged for its March 2017 delivery - show calculation? Cotton (ICE-US) - 50,000 lbs: cents per lb Date Open High Low Settle chg Dec Mar'17 62.29 61. 73 63.63 6 2.25 62.10 6 1.53 62.79 61.91 50 21 Open interest 94,584 | 68, 686 b. After entering into the March 2017 contracts for 100% of it's delivery exposure, suppose that the only three possible prices for cotton in March is to stay at the same level, increase by 5 cents and decrease by 10 cents, show the profit and loss from the futures contracts as well as the total proceeds for Luxury. D Inc/Decr= Price: Units rom Revenue from sales Profit/loss on futures Total Proceeds A Luxury Cotton ("Luxury), an independent distributor of cotton, is planning to sell 4.0 million lbs of cotton in March 2017 at the spot price on delivery day. In order to hedge against a possible decline in cotton prices, Luxury wants to enter into a Futures contract and lock in the price. The standard deviation of the per lh is calculated 0.04 (4.096), the standard deviation of the change in the futures is 0.035 (3.5%) and the coefficient of correlation between the price of cotton and change in the futures price is 0.80. a. Looking at the Future's Contract table below, how many contracts should Luxury optimize so that 2/3 of it's exposure it's hedged for its March 2017 delivery - show calculation? Cotton (ICE-US) - 50,000 lbs: cents per lb Date Open High Low Settle chg Dec Mar'17 62.29 61. 73 63.63 6 2.25 62.10 6 1.53 62.79 61.91 50 21 Open interest 94,584 | 68, 686 b. After entering into the March 2017 contracts for 100% of it's delivery exposure, suppose that the only three possible prices for cotton in March is to stay at the same level, increase by 5 cents and decrease by 10 cents, show the profit and loss from the futures contracts as well as the total proceeds for Luxury. D Inc/Decr= Price: Units rom Revenue from sales Profit/loss on futures Total Proceeds A
