Due to COVID-19, the productivity of wheat declines in Australia in the early season of 2021 (August 1). An Australian wheat farmer expects to sell 40,000 kilograms of wheat on 25 August. Th September futures price for wheat is currently AUD 215 per kilogram. The contract size is 2,500 kilograms of wheat. (a) Design a hedging strategy for this farmer using the September futures contract, if the farmer has to use a hedge ratio of 0.6 due to his financial difficulty during COVID-19. (b) Using the concept of basis risk determine the outcome of the hedging strategy if the spot price on 25 August is AUD 230 per kilogram and the futures price is AUD 240 per kilogram.

Due to COVID-19, the productivity of wheat declines in Australia in the early season of 2021 (August 1). An Australian wheat farmer expects to sell 40,000 kilograms of wheat on 25 August. Th September futures price for wheat is currently AUD 215 per kilogram. The contract size is 2,500 kilograms of wheat. (a) Design a hedging strategy for this farmer using the September futures contract, if the farmer has to use a hedge ratio of 0.6 due to his financial difficulty during COVID-19. (b) Using the concept of basis risk determine the outcome of the hedging strategy if the spot price on 25 August is AUD 230 per kilogram and the futures price is AUD 240 per kilogram.

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

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Use the following information for Problems 21 and 22.On November 1, 2017, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2018, at a price of 200,000 Brazilian reals. On November 1, 2017, Dos Santos pays $1,500 for a three-month call option on 200,000 reals with a strike price of $0.40 per real. Dos Santos properly designates the option as a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2017, the option has a fair value of $1,100. The following spot exchange rates apply:What is the net impact on Dos Santos Company’s 2018 net income as a result of this hedge of a forecasted foreign currency transaction? Assume that the raw materials are consumed and become a part of the cost of goods sold in 2018.a. $80,000 decrease in net income.b. $80,600 decrease in net income.c. $81,100 decrease in net income.d. $83,100 decrease in net income.
Suppose a oil producer wants to hedge against possible price fluctuations in the market. For example, in November, he decides to enter into a short-sell position in a 2 (two) futures contracts in order to limit his exposure to a possible decline in the cash price prior to the time when he will sell his oil in the cash market. Assume that the spot price of oil is $30 and the futures price for a March futures contract is $45. What is the basis? Выберите один ответ: a. 30 b. 7.5 c. 25 d. 15 e. 45
Q1. Suppose a Bangladeshi exporter is expecting to receive $15 million sometime in the next three months from an American importer. To hedge this, the Bangladeshi exporter buys an option on the USS. The premium is 0.55 BDT/USS, for options with Exercise price = 0.551 a) What option should he buy? b) What is the cost incurred today by the Bangladeshi exporter? c) ) What is the price floor that the exporter has set on the price of US$ 84.5 BDT/USS.? d) What is the actual amount that the exporter will receive if the spot rate at the end of three months is 85.5 BDT/USS? e) What is the actual amount that the BD exporter will receive if the spot rate at the end of three months is 84.5 BDT/USS? Q2. Suppose a Bangladeshi importer is expecting to pay $15 million sometime in the next three months to an American exporter. To hedge this, the Bangladeshi importer buys an option on the US$. The premium is 0.75 BDT/US$, for options with Exercise price = 86.5 BDT/US$. a) What option should he buy? b)…
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.
You are in New Zealand. You are planning to price an American put option on Canadian dollar futures, maturing in 8 months. You plan to use a 3 step tree. The New Zealand interest rate is 9.40%, while the Canadian interest rate is 0.60% (both with continuous compounding). The Canadian dollar futures price has volatility 19.6096. What is the risk neutral probability for the up state? 0.4601 O 04769 0.5836 005010
A farm that produces corn is looking to hedge their exposure to price fluctuations in the future. It is now May 15th and they expect their crop to be ready for harvest September 30th. You have gathered the following information: Bushels of corn they expect to produce 44,000 May 15th price per bushel $3.08 Sept 30 futures contract per bushel $3.22 Actual market price Sept 30 $3.37 Required (round to the nearest dollar): Calculate the gain or loss on the futures contract and net proceeds on the sale of the corn. Net gain or loss on future $Answer Sell the corn $Answer Net $Answer
After collecting basis data, a canola grower feels that 775 dollars per tonne is a realistic forward cash price for the fall’s crop since November canola futures are trading at 800 dollars per tonne. To hedge, the producer purchases an at-the-money PUT for 20 dollars tonne on May 19th. While the hedge was in place, canola producers in Europe experienced crop failures and consumers in China began to import large quantities of canola produced in Canada. By October 15th, November canola futures had risen to 825 dollars per tonne. However, because of increased local production, the basis in the grower’s region weakened by 5 dollars tonne. On October 15th the grower sold his canola in the cash market. Use T-accounts to answer the following: a. What is the net selling price from hedging using the PUT? b. What price would the producer have received if he had hedged using futures?
Assume the spot Swiss franc is $0.7040 and the six-month forward rate is $0.7030. What is the Value of a six-month call and a put option with a strike price of $0.6840 should sell for in a rational market? Assume the annualized six-month Eurodollar rate is 3.50 percent. Assume the annualized volatility of the Swiss franc is 14.20 percent. Use the European option-pricing models to value the call and put option. This problem can be solved using the FXOPM.xls spreadsheet. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Option Call Put Value cents cents
Assume the spot Swiss franc is $0.7045 and the six-month forward rate is $0.7040. What is the Value of a six-month call and a put option with a strike price of $0.6845 should sell for in a rational market? Assume the annualized six-month Eurodollar rate is 3.50 percent. Assume the annualized volatility of the Swiss franc is 14.20 percent. Use the European option-pricing models to value the call and put option. This problem can be solved using the FXOPM.xls spreadsheet. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Option Call Put Value cents cents
Masukh
An investment manager based in Germany hedges a portfolio of UK gilts with a 3-month forward contract. The current spot rate is GBP0.833/EUR and the 90-day forward rate is GBP0.856/EUR. At the end of 3 months, the gilts have risen in value by -2.50% (in GBP terms), and the spot rate is now GBP0.82/EUR. What was the true cost of the forward contract? a. 11.044% annualised. b. 17287% annualised. c. 7287% annualised. d. 14.787% annualised.
A put option with an exercise price of $56 will expire in 180 days. The underlying asset price of today is $160 . The underlying asset price at expiration is $126. The risk-free rate is 2%, What is the lower bounds for an European put?

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