XYZ flour company is planning to buy wheat for the next year’s production. 10,000 bushels of wheat will be purchased each
XYZ flour company is planning to buy wheat for the next year’s production. 10,000 bushels of wheat will be purchased each quarter, on the 15th of January, April, July, and October in 2022. It wants to lock the wheat price using a futures contract, and at the same time use a swap to prepare the expenditure. The spot price of wheat today (April 15, 2021) is $3.1 per bushel, and the company enters futures contracts today. The prevailing interest rate is 1.5%, compounded continuously. Recall that each futures contract is for 5000 bushels and assume no storage cost of wheat.
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(a) If the company uses a prepaid swap, what is the prepayment?
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(b) If the company uses a plain vanilla swap for the quarterly purchase next year, what is the fixed amount?
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