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55.
You are the buyer for a cereal company and you must buy 80,000 bushels of
corn next month. The futures contracts on corn are based on 5,000 bushels
and are currently quoted at 415′0 cents per bushel for delivery next month.
If you want to hedge your cost, you should _____ contracts at a cost of _____
per contract.
56.
You are a jewelry maker. In May of each year, you purchase 10,000 troy
ounces of silver to restock your production inventory. Today, you hedged
your position at what turned out to be the lowest price of the day. Assume
the actual price per troy ounce of silver is 9.215 in May. How much did you
gain or lose by hedging your position?
Silver - 5,000 troy oz.: U.S. dollars and cents per troy oz.
57.
You are the purchasing agent for a major cookie company. You anticipate
that your firm will need 20,000 bushels of oats in December. You decide to
hedge your position today and did so at the closing price of the day. Assume
that the actual market price turns out to be 228.0 on the day you actually
buy the oats. How much did you gain or lose by hedging your position?
Oats - 5,000 bu.: cents per bu.
58.
How much will you pay per pound for a September 130 orange juice futures
call option?
Orange juice - 15,000 lbs: U.S. cents per lb.
59.
How much will you pay to purchase five August 125 orange juice futures put
option contracts?
Orange juice - 15,000 lbs: U.S. cents per lb.
60.
Suppose you purchase a September cocoa futures contract at the last price
of the day as shown in the table below. What will be your profit or loss on
this contract if the price turns out to be $1,707 per metric ton at expiration?
Futures:
Cocoa - 10 metric tons, $ per ton
61.
Suppose you sell nine September silver futures contracts at the last price of
the day as shown in the table below. What will be your profit or loss on this
contract if the price turns out to be $12.09 per ounce at expiration?
Futures:
Silver - 5,000 troy oz, U.S. cents per troy oz.
62.
Suppose you purchase the November call option on orange juice futures
with a strike price of 150 at the price shown in the table below. What will be
your profit or loss on this contract if the price of orange juice futures is
$0.616 per pound at expiration of the option contract?
Futures Options
Orange juice: 15,000 lbs, U.S. cents per lb.
63.
Suppose a financial manager buys call options on 45,000 barrels of oil with
an exercise price of $31 per barrel. She simultaneously sells a put option on
45,000 barrels of oil with the same exercise price of $31 per barrel. Her net
profit per barrel is _____ if the price per barrel is $29 and _____ if the price
per barrel is $35.
64.
Suppose your firm produces breakfast cereal and needs 65,000 bushels of
corn in December for an upcoming promotion. You would like to lock in your
costs today because you are concerned that corn prices might go up
between now and December. To hedge your risk exposure, you could
purchase corn futures contracts today effectively locking in a total
settlement price of _____, based on the closing price shown in the table
below.
Futures:
Corn - 5,000 bu., U.S. cents per bu.
Essay Questions
65.
What are the primary motives for a hedger and a speculator in the
derivatives market? If a wheat farmer sells wheat futures, is that hedging or
speculating? Explain.
66.
Explain how a manufacturer who has an ongoing need for silver as a raw
material in the production process might use futures to hedge. What does
the manufacturer hope to gain?
67.
What is cross-hedging? Why do you suppose firms use this method of risk
management? What are some of the drawbacks?
68.
Explain why a swap is effectively a series of forward contracts.
