Freddie the Farmer currently has soybeans growing in his fields. Freddie's concerned that the price of soybeans may decline before he has the chance to take his output to market in 3 months. Freddie believes his crop yield will be 120,000 bushels of soybeans so he contacts a broker and is quoted a price of $3.50 for 3-month soybean futures contract (assume each contract is for 15,000 bushels). The broker informs Freddie that his initial margin will be $3,000 per contract with a maintenance margin of $1,500 per contract. Based on this information, answer the following questions (YOU MUST SHOW ALL CALCULATIONS TO RECEIVE CREDIT): Should Freddie go long or short in soybeans? Why? How many contracts should Freddie transact in? How much is each contract worth at inception? How much must Freddie remit to the broker (in total) at the time the futures contracts are purchased? If the futures price increases to $3.62 one month into the contract, what is the value of each contract? What will Freddie have to do per the terms of the futures contracts?
Freddie the Farmer currently has soybeans growing in his fields. Freddie's concerned that the price of soybeans may decline before he has the chance to take his output to market in 3 months. Freddie believes his crop yield will be 120,000 bushels of soybeans so he contacts a broker and is quoted a price of $3.50 for 3-month soybean futures contract (assume each contract is for 15,000 bushels). The broker informs Freddie that his initial margin will be $3,000 per contract with a maintenance margin of $1,500 per contract. Based on this information, answer the following questions (YOU MUST SHOW ALL CALCULATIONS TO RECEIVE CREDIT): Should Freddie go long or short in soybeans? Why? How many contracts should Freddie transact in? How much is each contract worth at inception? How much must Freddie remit to the broker (in total) at the time the futures contracts are purchased? If the futures price increases to $3.62 one month into the contract, what is the value of each contract? What will Freddie have to do per the terms of the futures contracts?
Chapter21: Risk Management
Section: Chapter Questions
Problem 4P
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Question
Freddie the Farmer currently has soybeans growing in his fields. Freddie's concerned that the price of soybeans may decline before he has the chance to take his output to market in 3 months. Freddie believes his crop yield will be 120,000 bushels of soybeans so he contacts a broker and is quoted a price of $3.50 for 3-month soybean futures contract (assume each contract is for 15,000 bushels). The broker informs Freddie that his initial margin will be $3,000 per contract with a maintenance margin of $1,500 per contract. Based on this information, answer the following questions (YOU MUST SHOW ALL CALCULATIONS TO RECEIVE CREDIT):
- Should Freddie go long or short in soybeans? Why?
- How many contracts should Freddie transact in?
- How much is each contract worth at inception? How much must Freddie remit to the broker (in total) at the time the futures contracts are purchased?
- If the futures price increases to $3.62 one month into the contract, what is the value of each contract? What will Freddie have to do per the terms of the futures contracts?
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