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Futures Contracts

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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