Question
The current spot price of wheat is $347.75. Assume that the standard deviation of monthly changes in the spot price of wheat is 1.1. The
The current spot price of wheat is $347.75. Assume that the standard deviation of monthly changes in the spot price of wheat is 1.1. The standard deviation of monthly changes in wheat futures price for the closest contract is 1.6. The correlation between the futures price changes and the spot price changes is 0.8. It is now October 12. Agri A is committed to purchasing 300 metric tons of wheat a month from now. The firm wants to hedge its risk using the December 2022 wheat futures contracts. Each contract is for the delivery of 50 metric tons of wheat.
a) Calculate wheat's one-month and one-year Futures prices, assuming the risk-free rate is 4%.
b) What strategy should Agri A management follow given its commitment described above? Show all calculations involving the strategy.
c) Should Agri A have any concerns if they use the forwards market instead to hedge their risk?
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