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Risk Management (MBA)

ADM has a warehouse located next to a railroad track.

They buy truck loads of grain and warehouse the grain until they get enough to load a train.

Once the grain is loaded on to the train it is sent to the Mississippi delta to be loaded in to a Panamax dry bulk ship for export to China.

You have been hired by ADM as a risk manager.

Your responsibility is to manage ADM's risk exposure.

In this example you need to construct a hedge to eliminate price risk.

The Panamax bulk carrier holds 50,000 tons.

That is equivalent to 100 million pounds.

Soybeans weigh 60 lbs per bushel.

Assume that ADM buys the soybeans in Cincinnati, OH during the month of June, 2011 (all at once on the 15 th).

The river barges will be loaded in Cincinnati, OH in June of 2011 and begin transport down the Ohio River to the Mississippi River to New Orleans.

The Panamax will be loaded during the week of July, 2011 .

Once the soybeans are completely loaded at the end of that 1 st week in July, ownership transfers to China.

Assume that soybeans are $13/bushel in June and $14/bushel in July.

Further assume that spot price is equal to futures, basis = 0.

Soybean futures contracts are traded on the Chicago Board of Trade ( www.cmegroup.com) where 1 contract equals 5,000 Bushels.


a. Construct a futures hedge for ADM to manage this risk.

Be sure to correctly specify the number of contracts, dates, spot market price, futures market price.

Be sure to show the profit or loss from the hedge.

b.What is the capital requirement to initiate the margin requirements for the contracts .

C.Based on the same assumptions for the above , construct an options hedge for the same purpose.

Be sure to show the profit or loss from the hedge.

Solution Preview

Please see the attached file(s) for the complete tutorial

Inventory 50,000 tons of grain
100,000,000 pounds of grain
Scale 60 pounds per bushel
Purchase date June 15
Target loading date July 7 or 1st week

Price per bushel
June $13.00
Junly $14.00

1 Futures contract 5,000 bushels

Number of contracts 333 rounded down. You cant's buy a fraction of a futures ...

Solution Summary

Risk management for a warehouse located next to a railroad track is determined.