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    Futures Contracts

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    1. A farmer anticipates having 50,000 bushels of wheat ready for harvest in September. What would be the implications of hedging by (a) selling 8 contracts (b) selling 10 contracts, and (c) selling 12 contracts of September wheat?

    2. A soybean processor intends to acquire 350,000 bushels of beans in July, process them into meal and oil, and sell these products in August. Conversion ratios are as follows:
    1 bushel beans = 50 lb meal
    9 lb oil
    1 lb water

    Put on a crush indicating the profit margin and the number of contracts to buy and sell. Prices are as follows:

    July beans = $5.9275/bushel
    August oil = $0.2121/lb
    August meal = $247.80/ton

    3. What is basis? Explain the difference between "normal backwardation" and "contango."

    4. What is the meaning of "marked-to-market"? What is the difference between open interest and volume of trade?

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    1. A farmer anticipates having 50,000 bushels of wheat ready for harvest in September. What would be the implications of hedging by (a) selling 8 contracts (b) selling 10 contracts, and (c) selling 12 contracts of September wheat?

    Size of contracts (CBOT)
    1 contract= 5,000 bushels

    For 50,000 bushels, number of contracts required for hedging= 10 =50,000 / 5,000

    (a) selling 8 contracts
    With 8 contracts 40,000 bushels are hedged =5,000 x 8
    Remaining 10,000 bushels are not hedged
    Therefore, there is a speculative cash postion for 10,000 bushels
    Thus there is under-hedging

    (b) selling 10 contracts

    With 10 contracts 50,000 bushels are hedged =5,000 x 10
    Since, the cash position is for 50,000 bushels
    The entire cash position is hedged

    (c) selling 12 contracts

    With 12 contracts 60,000 bushels are accounted for =5,000 x 12
    Since, the cash position is for 50,000 bushels
    There is overhedging
    Therefore, there is a speculative future postion for 10,000 bushels

    2 A soybean processor intends to acquire 350,000 bushels of beans in July, process them into meal and oil, and sell these products in August. Conversion ratios are as follows:
    1 bushel beans = 50 lb meal
    9 lb oil
    1 lb water

    Put on a crush indicating the profit margin and the number of contracts to buy and sell. Prices are as follows:

    July beans = $5.9275 /bushel
    August oil = $0.2121 /lb
    August meal = $247.80 /ton

    Size of contracts (CBOT)

    Soybeans: 5,000 bushels
    Soybeans oil: 60,000 lbs
    Soybeans meal: 100 short tons

    Soybeans:
    Amount of soybean to be procured= 350,000
    Therefore, number of contracts required= 70 contracts =350,000 / 5,000

    Soybeans oil:
    1 bushel of soybeans= 9 lb oil
    Thereofre, 350,000 bushel of soybeans= 3,150,000 lb oil =350,000 x 9
    60,000 lbs of oil = 1 contract
    Therefore, 3,150,000 lbs of oil = 52.50 contract =3,150,000 / 60,000

    Soybeans meal:
    1 bushel of soybeans= 50 lb meal
    Thereofre, 350,000 bushel of ...

    Solution Summary

    Answers to questions on Futures related to Hedging, crush, basis, normal backwardation,, contango, marked-to-market, open interest, volume of trade etc.

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