Question
Part A Sunshine Co. is a newly listed firm that you would like to invest in when you receive your year-end bonus in December. Call
Part A Sunshine Co. is a newly listed firm that you would like to invest in when you receive your year-end bonus in December. Call options expiring in December on these shares have a strike price of R500 and are available for a premium of R33.75, while put options with the same strike price are selling for R23.50. Required: Identify the action you could take today, and calculate your net position if the underlying share price in December is R550. Each contract is for 100 Sunshine Shares. (8 marks: 7 minute)
Part B Farmers Co. expects to harvest 1000 tons of maize in January. Given the increasing prices of fuel (and therefore harvesting costs), the CEO wants to hedge the price risk they are exposed to due to selling their crop in the future. The January futures price for maize is R100 per ton.
(a) Should Farmers long or short the January futures contract? Why? [2]
(b) Demonstrate that the hedge will work regardless of if the January price ends up being either R90, R100 or R110 per ton. Replicate the table below in your answer booklet, and provide answers and/or short explanations for each of (a)-(l) below. [10]
Price at Harvest: 90 100 120
Spot Market Outcome: (a) (b) (c)
Future Market Outcome: (d) (e) (f)
Net Effect: (g) (h) (i)
Price per Ton: (j) (k) (l)
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