Consider the following situation You are requested to make an offer today (April 2022) to a...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Consider the following situation You are requested to make an offer today (April 2022) to a client for physical delivery of 25 tonnes of butter per month in Q3. You don't want to run a price risk on this deal and lock in the margin at the day of the transaction. You can assume that there is no basis risk. Show the difference between a traditional Physical Hedge (Back to Back, cash and carry) and the best possible hedge with Physical and Futures. ■ ■ ■ ■ ■ I The cost of carry are €20/tonne per month (assume no other costs) The margin on this deal is 50€ / tonne. Assume that the physical product is both produced and delivered in the last week of the month (delivery in July means that you buy in June and finance + store during the delivery month) You pay the suppliers after 30 days, and the clients pays after 30 days. The spot price today (April 2022) is €3550/ton The futures market for butter as of today looks as per below One futures contract represents 5 tonnes of butter NAME APR2 MAY2 JUN2 JUL2 AUG2 SEP2 OCT2 NOV2 DEC2 LAST PRICE BID SIZE 3483 4 3388 7 3375 10 3375 12 3390 9 3400 7 3350 5 3400 3 3400 BID 3425 3350 3350 3300 3330 3300 3250 3250 ASK 3540 3425 3400 3450 3450 3500 3450 3400 ASK SIZE 6 7 12 5 8 2 2 6 Question 1 Calculate the annualized margin for the first delivery in july, and evaluate if this is a good deal or not if you know that shareholders request 20% ROI. Question 2 What would be your best offer for both types of hedges. Question 3 After the sale, in June and July, the settlement prices for the JUN22 and JUL22 contracts are 3600€ and 3650 € respectively. What are the physical and futures cash flows for the July 2022 delivery (for the offer using the hedge with physical and futures market)? You can use the payoff schedule below to answer the question Consider the following situation You are requested to make an offer today (April 2022) to a client for physical delivery of 25 tonnes of butter per month in Q3. You don't want to run a price risk on this deal and lock in the margin at the day of the transaction. You can assume that there is no basis risk. Show the difference between a traditional Physical Hedge (Back to Back, cash and carry) and the best possible hedge with Physical and Futures. ■ ■ ■ ■ ■ I The cost of carry are €20/tonne per month (assume no other costs) The margin on this deal is 50€ / tonne. Assume that the physical product is both produced and delivered in the last week of the month (delivery in July means that you buy in June and finance + store during the delivery month) You pay the suppliers after 30 days, and the clients pays after 30 days. The spot price today (April 2022) is €3550/ton The futures market for butter as of today looks as per below One futures contract represents 5 tonnes of butter NAME APR2 MAY2 JUN2 JUL2 AUG2 SEP2 OCT2 NOV2 DEC2 LAST PRICE BID SIZE 3483 4 3388 7 3375 10 3375 12 3390 9 3400 7 3350 5 3400 3 3400 BID 3425 3350 3350 3300 3330 3300 3250 3250 ASK 3540 3425 3400 3450 3450 3500 3450 3400 ASK SIZE 6 7 12 5 8 2 2 6 Question 1 Calculate the annualized margin for the first delivery in july, and evaluate if this is a good deal or not if you know that shareholders request 20% ROI. Question 2 What would be your best offer for both types of hedges. Question 3 After the sale, in June and July, the settlement prices for the JUN22 and JUL22 contracts are 3600€ and 3650 € respectively. What are the physical and futures cash flows for the July 2022 delivery (for the offer using the hedge with physical and futures market)? You can use the payoff schedule below to answer the question
Expert Answer:
Answer rating: 100% (QA)
Question 1 To calculate the annualized margin for the first delivery in Julywe need to first calculate the total margin for the deliveryThis is done b... View the full answer
Related Book For
An Introduction to Derivative Securities Financial Markets and Risk Management
ISBN: 978-0393913071
1st edition
Authors: Robert A. Jarrow, Arkadev Chatterjee
Posted Date:
Students also viewed these accounting questions
-
In Fig. E6.7 assume that there is no friction force on the 20.0-N block that sits on the tabletop. The pulley is light and frictionless. (a) Calculate the tension T in the light string that connects...
-
You are testing the null hypothesis that there is no linear relationship between two variables, X and Y. From your sample of n = 10, you determine that r = 0.80. a. What is the value of the t test...
-
You are testing the null hypothesis that there is no linear relationship between two variables, X and Y. From your sample of n = 20, you determine that SSR = 60 and SSE = 40. a. What is the value of...
-
Imagine you discover a yeast mutant that exhibits a general inability to grow and thrive compared to wild-type yeast. You predict that the mutant has a defect in a basic process necessary for...
-
After more than 40 years of operation, the Tyler Brick Mfg. Company has decided it is time to shut down the business. The firm has $125,000 available for distribution as a cash dividend immediately...
-
2. Show that F = (sin y + z)i+(xcos y z)j+(x y)k is a conservative field and calculate the value of its line integral from the origin to the point (3,/6, 2) along any path.
-
A machine is subjected to the vibration \[x(t)=20 \sin 50 t+5 \sin 150 t \mathrm{~mm} \quad(t \text { in } \mathrm{s})\] An accelerometer having a damped natural frequency of \(80 \mathrm{rad} /...
-
Colorado Mining paid $600,000 to acquire a mine with 40,000 tons of coal reserves. The following statements model reflects Colorado Minings financial condition just prior to purchasing the coal...
-
Wildhorse Corporation sells three different models of a mosquito "zapper. Model A12 sells for $65 and has unit variable costs of $46.00. Model B22 sells for $130 and has unit variable costs of...
-
John Parsons (123-45-6781) and George Smith (123-45-6782) are 70% and 30% owners, respectively, of Premium, Inc. (11-1111111), a candy company located at 1005 16th Street, Cut and Shoot, TX 77303....
-
You want to have $10 million dollars when you retire in 45 years.How much do you have to invest each month if you can earn 13% annual return (compounded monthly) on your investment?
-
The WhyEyeOughta general partnership is comprised of three general partners; Mo, Larry, & Curley. The partnership agreement calls for profits of the partnership to be allocated as per the following:...
-
After an upfront research and development cost of 1,500,000, Gillette is proposing a new three-blade razor (MACH-3) that they hope will be a success in the competitive razor market. The project...
-
Applying a linear regression model and fiding trends in data. 1. How these majors events reflects in the behavior of S&P500, Dow-Jones, please provide an explanation with supports and three...
-
The Income statement and balance sheet for Central Perks Inc. are provided here. Note that firm's capital expenditures are expected to rise by $50,000 in the new year. This will lead to an increase...
-
Assume for simplicity that these payments continue for 20 years and then cease. The interest rate is 4% . You plan to cover this obligation by investing in 5- and20-year maturity Treasury strips.(a)...
-
In historical studies there is a premium placed on finding out what the author originally meant given their native language, historical context, and primary audience. The effort of professors to...
-
The graph of the sequence whose general term is an = n - 1 is which of the following? [8.1] A. B. TITTT 3-2-1 23.45 2.3.4
-
When one compares forward rate agreement contracts to Eurodollar futures contracts, which have greater counterparty risk? Do you think this might influence the difference between FRA and futures...
-
What are the three conditions that the law requires to prove manipulation? Are these hard or easy to prove?
-
Boring Unreliable Gadget Inc.s stock price S is $50 today. It pays dividends of $1 after two months and $1.05 after five months. The continuously compounded interest rate is 4 percent per year....
-
Consider a stochastic process such that the underlying security \(S\) follows the model: \[d S_{t}=\mu S_{t} d t+\sigma_{t} S_{t} d Z_{t}\] where \(Z\) is a standard Brownian motion. Suppose the...
-
Calculate the solution to the following SDE: \[d X_{t}=\alpha\left(m-X_{t} ight) d t+\sigma d B_{t}\] with \(X_{0}=x\). The process satisfying this equation is called the meanreverting...
-
Let \(B_{t}\) be a standard Brownian motion started at 0 . Use that for any function \(f\) we have: \[\mathbf{E}\left[f\left(B_{t} ight) ight]=\frac{1}{\sqrt{2 \pi t}} \int_{-\infty}^{\infty} f(x)...
Study smarter with the SolutionInn App