Now is September 2015. Sophie will buy 10,000 pounds of lean hog in December 2015. To...

 

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Now is September 2015. Sophie will buy 10,000 pounds of lean hog in December 2015. To hedge the hog price, she buys a December 2015 maturity lean hog contract at the future price of $1.00 per pound. Suppose that when the contract matures in December 2015, the market price of hog turns out to be $1.20 per pound. This future contract calls for purchase of 10,000 pounds. a) Calculate Sophie's payoff from purchasing 10,000 pounds of hogs in the spot market in December 2015 (note: a payment for purchase is a negative payoff); b) Calculate Sophie's payoff from the future market in December 2015; c) Calculate Sophie's total payoff from both the spot and future markets in December 2015; d) If the market price of hog goes down to $0.90 per pound in December 2015, what's Sophie's total payoff? e) Draw the future contract payoff graph for Sophie. Now is September 2015. Sophie will buy 10,000 pounds of lean hog in December 2015. To hedge the hog price, she buys a December 2015 maturity lean hog contract at the future price of $1.00 per pound. Suppose that when the contract matures in December 2015, the market price of hog turns out to be $1.20 per pound. This future contract calls for purchase of 10,000 pounds. a) Calculate Sophie's payoff from purchasing 10,000 pounds of hogs in the spot market in December 2015 (note: a payment for purchase is a negative payoff); b) Calculate Sophie's payoff from the future market in December 2015; c) Calculate Sophie's total payoff from both the spot and future markets in December 2015; d) If the market price of hog goes down to $0.90 per pound in December 2015, what's Sophie's total payoff? e) Draw the future contract payoff graph for Sophie.

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