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You are in charge of malt barley purchasing for Duff Brewery. The brewery produces 1 billion bottles of beer or 3.35 million hectolitres of beer
You are in charge of malt barley purchasing for Duff Brewery. The brewery produces 1 billion bottles of beer or 3.35 million hectolitres of beer annually. Each hectolitre of beer requires 10.67 kilograms of barley. You purchase about 9,000 tonnes of barley each quarter. It is currently the beginning of the second quarter and you are considering your next purchase of barley in three months' time. Barley futures contracts trade on the Winnipeg Commodities Exchange. The contract that you use is the Western Barley contract, which calls for the delivery of 20 tonnes of barley. The contract is priced in dollars per tonne. Complete parts a and b below. a. To hedge this price risk, should you take a long or short position in the barley futures contracts? O A. Short . Long b. Assume that you enter the appropriate futures position to hedge this price risk at a futures price of $209/tonne. As the futures maturity date approaches, you buy your barley in the spot market, where it trades for $204/tonne, and you execute an offset trade in the futures market. Assume that, due to convergence, the futures price is equal to the spot price. What is your profit from the futures transaction and what is your total purchase cost for the 9,000 tonnes of barley? The total purchase cost includes profits from the futures transactions. (Assume that you can trade a fractional number of contracts.) Your profit from the futures transaction is (Type an integer or a decimal.)
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