Minetech Resources Berhad anticipates the need to purchase 80,000 bushels of soybeans in six months to use in their products. The current cash price for soybeans is RM5.50 a bushel. A six-month futures contract for soybeans can be purchased at RM5.53. Show all your working steps. i)Explain why Minetech Resources Berhad might need to purchase futures contracts to hedge their position. ii)To completely hedge their exposure, how many contracts will they need to purchase? Soybeans trade in 5,000-bushel contracts. iii)If the cash price of soybeans ends up at RM5.75 per bushel after six months, by how much will the actual cost of 80,000 bushels of soybeans have gone up? iv)After the futures contracts are closed outsold at RM5.75, what will be the gain on the futures contracts? v)Considering the answers to parts (iii) and (iv), what is their net position?
Minetech Resources Berhad anticipates the need to purchase 80,000 bushels of soybeans in six months to use in their products. The current cash price for soybeans is RM5.50 a bushel. A six-month futures contract for soybeans can be purchased at RM5.53.
Show all your working steps.
i)Explain why Minetech Resources Berhad might need to purchase futures contracts to hedge their position.
ii)To completely hedge their exposure, how many contracts will they need to purchase? Soybeans trade in 5,000-bushel contracts.
iii)If the cash price of soybeans ends up at RM5.75 per bushel after six months, by how much will the actual cost of 80,000 bushels of soybeans have gone up?
iv)After the futures contracts are closed outsold at RM5.75, what will be the gain on the futures contracts?
v)Considering the answers to parts (iii) and (iv), what is their net position?
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