2. You are a coffee dealer anticipating the purchase of 82,000 pounds of coffee in threemonths. You are concerned that the price of coffee will rise, so you take a long positionin coffee futures. Each contract covers 37,500 pounds, and so, rounding to the nearestcontract, you decide to go long in two contracts. The futures price at the time you initiateyour hedge is 55.95 cents per pound. Three months later, the actual spot price of coffeeturns out to be 58.56 cents per pound and the futures price is 59.20 cents per pound.a. Determine the effective price at which you purchased your coffee. How do youaccount for the difference in amounts for the spot and hedge positions?b. Describe the nature of the basis risk in this long hedge.

a)Given that;We entered into the long position at a price of 55.95 cents per poundFuture price after…

Answered: 2. You are a coffee dealer anticipating…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

The price of the July corn futures is $4.13, and the September corn futures are 10 cents higher. A trader thinks that the spread between July and September will contract.a. How would the trader use a spread order to bet on your view?b. Did the trader buy or sell the spread?c. How much money would you make if the price of July corn futures increases to $5.00 and the September contract drops to $4.50. Assume the spread trade was for 5000 bushels of corn.
Fred enters into a futures contract to buy 10,000 pounds of cotton for $8 per pound. The initial margin is 5% of contract value, and the maintenance margin is 75% of the initial margin. What price (per pound) of cotton futures will trigger a margin call? ______. What amount would Fred’s broker have to post in response to this margin call? ______.
You took a long position on the Micro WTI Crude Oil futures (MCL) when value of the futures was 71 and close it out four days later at a futures price of 89. Ignoring interest, what are your losses or gains in dollar? Remember that the Micro WTI Crude Oil futures are quoted in 10-cent increments, and a one-tick move in the Micro WTI Crude Oil futures equal to $1 or a one point move in the Micro WTI Crude Oil futures equal to $10. $135. O $162. $234. $180. O $216.
The futures price of an asset is currently 80 and the risk-free rate is 4%. A six-month put on the futures with a strike price of 85 is currently worth 6.5. What is the value of a six-month call on the futures with a strike price of 85 if both the put and call are European? What is the range of possible values of the six-month call with a strike price of 85 if both put and call are American? Show all work and briefly discuss.
Suppose that you bought two one-year gold futures contracts when the one-year futures price of gold was US$1,340.30 per troy ounce. You then closed the position at the end of the sixth trading day. The initial margin requirement is US$5,940 per contract, and the maintenance margin requirement is US$5,400 per contract. One contract is for 100 troy ounces of gold. The daily prices on the intervening trading days are shown in the following table. Day Settlement Price 0 1340.30 1 1345.50 2 1339.20 3 1330.60 4 1327.70 5 1337.70 6 1340.60 Assume that you deposit the initial margin and do not withdraw the excess on any given day. Whenever a margin call occurs on Day t, you would make a deposit to bring the balance up to meet the initial margin requirement at the start of trading on Day t+1, i.e., the next day. b. Fill the appropriate numbers in the blank cells in the following table. (Hint: See solution to Q19 in Lesson 2 Learning…
On July 1, an investor holds 50000 shares of a certain stock. The market price is $50 per share. The investor is interested in hedging against movements in the market over the next month and decides to use the September Mini S&P 500 futures contract. The index is currently 1500 and one contract is for delivery of $50 times the index. The beta of the stock is 1.5. What strategy should the investor follow? Under what circumstances will it be profitable?
Suppose you are concerned about your firm's jet fuel exposure that you need to acquire in November. Further, your analysis suggests the best futures contract to hedge jet fuel is unleaded gasoline. You decided to hedge for 100% of the price exposure. This is September and the spot prices of jet fuel is $1.108 and RBOB gasoline is $1.121. The RBOB gasoline December futures contact on CME is currently priced at $1.141. Assume two months have passed and you want to close your futures position in November. The spot prices of jet fuel and RBOB gasoline in November are $1.131 and $1.156. All prices are quoted per gallon. The November futures price for December RBOB gasoline is $1.183. Which of the following statements is false based on the above in formation? The gain from the futures hedge is $0.042 per gallon. The basis in November is -$0.027 The RBOB gasoline market is in contango. O The basis in October is -$0.033.
Clarke plans to satisfy cash needs in nine months by selling its Treasury bond holdings for $4 million. However, Clarke is concerned that interest rates might increase over the next three months. To hedge against this possibility, Clarke plans to sell Treasury bond futures. Thus, Clarke sells futures contract for a price of 99-12. Assuming that the actual price of the futures contract declined to 97-20, Clarke would make a of $___. from closing out the futures position. a. b. C. d. e. -——— 40; profit; $76,800 40; loss; $76,800 50; profit; $70,000 40; profit; $70,000 none of the above
You manage a bond portfolio worth $400 million. You wish to hedge your portfolio against rise in interest rates by using T-bond futures that will mature in 9 months. The duration of your bond portfolio is 6 years, the duration of the T-bond is 7 years. The bond futures price is 98,000, (a) What action must you take and how many contracts? (b) Why do you need to use the duration of the bonds to get the answer
= You were just notified that you will receive $100,000 in two months from the estate of a deceased relative You want to invest this money in safe, interest-bearing instruments, so you decide to purchase five-year Treasury notes. You believe, however, that interest rates are headed down, and you will have to pay a lot more in two months than you would today for five-year Treasury notes. You decide to look into futures, and find a quote of 108-28.7 for five-year Treasuries deliverable in two months (contracts trade in $100,000 units and require an initial margin is $680). What does the quote mean in terms of price, and how many contracts will you need to buy? How much money will you need to buy the contract, and how much will you need to settle the contract? XO 5-year Treasury notes are quoted at a par value of $100,000. Which of the following is the best answer? (Select the best answer below.) OA. Prices are quoted in increments of 1/32 of 1%, so the quote of 108-28.7 translates into…
When opening a new position on futures contract, a broker requires initial margin of 15% (of the initial contract size). The broker requires an investor to replenish his margin account when the balance falls below the maintenance margin of 10% (of initial contract size). What is the margin account balance of short trader at t=3? Futures prices each day are given below. They opened 10 contracts, and contract size is 100 bushels. t-0 (initial trade) t-1 t-2 t=3 a) $150 Ob) $240 Oc) $120 d) $60 Futures Price (per bushel) $0.4 $0.45 $0.35 $0.36 Long Position Margin Short Position Margin ???
An investor takes a long position in two gold futures contracts. Each gold futures contract is for delivery of 100 ounces of gold. The initial futures price is $1,250 per ounce. The initial margin is $6,000 per contract. The investor closes the contracts when the gold futures price is $1,226.90. If there was one margin call for $4,020, what is the balance in the margin account at the time of closing the futures contracts? a. $11,400 b. $11,800 c. $12,200 d. $12,600 e. $13,000

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS