Q24 Only

24 10 points Dick and Jane work in an commodities firm, CITOH, LLP, that trades spot metals, grains and other commodities and uses futures to hedge their risks. Occasionally they have no presence in a particular metal --for example, currently they have no exposure to spot silver and copper. Jane wonders aloud, "Even without a holding of the metals, can't we step in to provide futures on those metals to those who are hedging their holdings, just like we do with the rest of our inventory in which we trade? Surely there is a profit potential -- an expected return to going long or short -- that we could earn?" Answer her question briefly -- focus on what should lead them to go long or short in futures in these markets for speculation -- and assume that they are risk averse but always open to opportunities that have positive expected returns. BI U AA- IX E IX X 14pt Paragraph fc O words 220 max 25 10 points Nabisco Brands' purchasing manager uses wheat futures to control the risk of the acquisition cost of wheat for its factories. They plan to buy the wheat from local merchants (usually to the tune of 100,000 bu each month) in an ongoing basis but as prices fluctuate, they use wheat futures traded in the Chicago Board of Trade to limit the risk of their total costs. They hedge their spot purchases one-for-one in the futures market. Today (130ct20) the Jan Wheat futures contract is quoted at $4.85/bu. Each contract calls for the delivery of 5,000 bu, and the Initial Margin and Maintenance Margin they deposit are $2,500 and $1,500 resp. (i) Should they BUY or SELL Jan wheat future and what's the total IM they must deposit? (II) Given the data today, at what futures price can they expect a margin call? (ii) On Nov 13, they are called by a local dealer who offers to deliver 50,000 bushels to them on Jan 13 for a fixed price of $4.78/bu; the same day, the Jan futures price is at 4.76/bu they accept this offer, and close 10 contracts in the Jan futures. Indicate briefly why they do that closing trade, and compute the price at which they have acquired 50,000 bu of their needed Jan wheat (iii) On Dec 13, another local dealer calls to offer them 50,000 bu deliverable 13 Jan at a fixed price of $4.95; on Dec 13 the Jan futures is at $4.96. If they accept the offer and reverse their futures trade, what is the all-in price per bu at which they have met all their needs for Jan wheat? Show your work BI A.A, IK EE3 xx, 14pt Paragraph Submit