Answered step by step
Verified Expert Solution
Question
1 Approved Answer
The manager of a feedlot just bought a call on the corn futures contract for March 2024 delivery because he wants to hedge the grain,
- The manager of a feedlot just bought a call on the corn futures contract for March 2024 delivery because he wants to hedge the grain, he is going to buy next year to feed his cattle. The call he bought has a strike price of $5.00/bu and he paid $0.25/bu for this call. Assume no trading fees here.
- Assuming the historical basis in his cash market is around -$0.30/bu in March, what is the maximum buying price he established with this call? Make sure to show all calculations clearly.
- Now we move forward and it's March 2024. The manager of the feedlot is buying corn and lifting his hedge. Assume that, on the day he is buying the grain and lifting the hedge, the spot price in his local cash market is $4.55/bu and the futures price is $4.80/bu. What is the realized price of this hedge? Make sure to show all calculations clearly.
- In this example, would the feedlot manager be better off with or without the hedge? Why?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started