You are a potato farmer. In 6 months, you will harvest 10,000,000 lbs of potato. There is currently no active potato future contract, and you want to hedge the price of potato. You did some research and found that corn future can be a good hedge for potato. A corn future is for 5,000 bushel and each bushel weighs 60lbs. The current 6-month corn future contract is trading at $6.45 (each contract is multiple of 5000 bushel, hence each contract is worth 6.45*5000 = $32,275). Daily corn future price has a .94 correlation with potato price; daily corn future volatility/standard deviation is 1.24% and daily potato price volatility/standard deviation is 1.36%. 1. How can you hedge your potato price? 2. Calculate the hedge ratio? 3. Calculate the number of contracts you will need to hedge, assuming you can transact fraction of a contract.

You are a potato farmer. In 6 months, you will harvest 10,000,000 lbs of potato. There is currently no active potato future contract, and you want to hedge the price of potato. You did some research and found that corn future can be a good hedge for potato. A corn future is for 5,000 bushel and each bushel weighs 60lbs. The current 6-month corn future contract is trading at $6.45 (each contract is multiple of 5000 bushel, hence each contract is worth 6.45*5000 = $32,275). Daily corn future price has a .94 correlation with potato price; daily corn future volatility/standard deviation is 1.24% and daily potato price volatility/standard deviation is 1.36%. 1. How can you hedge your potato price? 2. Calculate the hedge ratio? 3. Calculate the number of contracts you will need to hedge, assuming you can transact fraction of a contract.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter21: Risk Management

Section: Chapter Questions

Problem 4P

See similar textbooks

Similar questions

You are the buyer for a cereal company and you must buy 80,000 bushels of corn next month. The futures contracts on corn are based on 5,000 bushels and are currently quoted at 415′0 cents per bushel for delivery next month. If you want to hedge your cost, you should _____ contracts at a cost of _____ per contract.
A farmer sows a certain crop. It costs $240,000 to buy the seed, prepare the ground, and sow the crop, In one year's time it will cost $123,200 to harvest the crop. The farmer's best estimate is that the crop will be worth $380,000 in one year. The farmer can borrow and lend at an interest rate is 7%. Part B) The farmer is concerned about the uncertainty surrounding the price that she will receive for her harvested crop in one year. She has the opportunity to enter into a forward agreement whereby she can lock-in a sale price of $405,000 for her harvested crop in one year, thus eliminating any uncertainty. The cost entering into this contract is $23,500, payable today. Should the farmer enter into this forward agreement and lock-in the sale price of her harvested crop? O A. Yes, she should enter into this agreement. O B. No, she should not enter into this agreement,
The Home Depot is clearing out lawn mowers for $399.75 in an end-of-season sale that ends on September 30. Alternatively, you could wait until April 1 (assume February is in a non–leap year) and pay $419.95 on the same lawn mower. Assume your money can earn simple interest of 4.72% on a short-term investment.a. Which option should you choose?b. How much money will you have saved on September 30 by making that choice?
URGENT!!!
You are trying to decide between two mobile phone carriers. Carrier A requires you to pay $200 for the phone and then monthly charges of $58 for 24 months. Carrier B wants you to pay $115 for the phone and monthly charges of $68 for 12 months. Assume you will keep replacing the phone after your contract expires. Your cost of capital is 3.7% APR, compounded monthly. Based on cost alone, which carrier should you choose? The EAA for plan A is $ (Round to the nearest cent.)
Your firm needs to purchase 8,000 safety vests from a supplier. One supplier demands a payment of $32,000 today plus $5.00 per vest payable in one year. Another supplier will charge $9.50 per vest, also payable in one year. If the discount rate is 7.10% per year, compounded annually, how much does your firm save by taking the less expensive offer compared to the more expensive offer
You are trying to decide between two mobile phone carriers. Carrier A requires you to pay$185 for the phone and then monthly charges of $54 for 24 months. Carrier B wants you to pay $105 for the phone and monthly charges of $68 for 12 months. Assume you will keep replacing the phone after your contract expires. Your cost of capital is 3.9%APR, compounded monthly. Based on cost alone, which carrier should you choose? The EAA for plan A isThe EAA for plan B isThe EAA for plan C is
Some laboratory equipment sells for $85,000. The manufacturer offers financing at 6% with annual payments for 5 years for up to $65,000 of the cost. The salesman is willing to cut the price by 10% if you pay cash. What is the interest rate you would pay by financing
A database marketing firm can lease its computer equipment with beginning-of-quarter payments of $10,000 for three years. Alternatively, it can purchase the equipment for $131,200 on a loan at a rate of 9% compounded quarterly with an expected resale value after three years of $33,000. Which option would you recommend, and how much better in today's dollars is your chosen alternative?
We purchase a machine with a price of $400,000. We pay 20% up front, and will finance the rest over a 2 year period. When the purchase occurs: A. We will have a note payable of $320,000. B. No, we will not have a note payable of $320,000.
You are offered a 3 year investment opportunity that requires investing USD 1,505 today. The investment will pay you an income of USD 66 in year 1. USD 76 in year 2 and USD 73 in year 3. At the end of year 3, it will also pay a total sum of USD 2,227. THE current discount rate is 0.13 percent. Is the investment worth undertaking? Give your answer in 0.000.
You have a chance to buy an annuity that pays $50,000 at the beginning of each year for 15 years. You could earn 10.0% on your money in other investments with equal risk. What is the most you should pay for the annuity? You are not required to show calculations. However to receive credit you must provide the inputs used (N, PMT, FV, I/Y, PV) to solve. If you utilize a template, you can copy and paste the section used in the submission. $418,334.37 $750,000.00 $380,303.98