Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Suppose ABC Cereals manufactures high quality breakfast cereal. The company will need to buy 15,000 bushels of wheat for September production which is several months

Suppose ABC Cereals manufactures high quality breakfast cereal. The company will need to buy 15,000 bushels of wheat for September production which is several months away. The price of wheat today is $4.00 a bushel and futures contracts that expire in late August just in time for September production have futures price of $5.00 per bushel. The company locks in the futures price by entering the contract. Wheat prices in late August, at expiration of the futures, turnout to be $3.50 per bushel. Wheat contract size is 5,000 bushels.

1) How many contracts does the company need to hedge this position?

2) Should the company go long or short the futures contracts?

3) What was the profit or loss on the spot position, futures position and overall?

Refer to the ABC Cereals wheat futures contract example above. Using the same prices you selected in that problem, answer the following assuming basis = s-f 1) What was the basis per bushel when the futures were entered?

2) What was the basis per bushel when the futures contract expired?

3) How would you check your work?

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

Step: 3

blur-text-image

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

Fundamentals of Investing

Authors: Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk

12th edition

978-0133075403, 133075354, 9780133423938, 133075400, 013342393X, 978-0133075359

More Books

Students also viewed these Finance questions

Question

what is risk acceptance

Answered: 1 week ago