Q6. Suppose that a beef packer was planning in April 2023 to purchase 500 Live Cattle...
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Q6. Suppose that a beef packer was planning in April 2023 to purchase 500 Live Cattle in Aug 2023. Expected fed cattle weight is 1200 lbs. per animal. On 03 Apr 2023, the cash price of fed cattle was 170.25 cents/lb., and the price of Aug 2023 CME Live Cattle futures was 187.25 cents/lb. The beef packer was worried that the cash price of fed cattle might increase in August and hedged using a Call option. So, he hedged against her input price risk. On 03 Apr 2023, the call option on Aug 2023 CME Live Cattle with SP = 170 cents/lb. was trading at 4.50 cents/lb. The beef packer placed the hedge on 03 Apr 2023, and lifted the hedge on 02 Aug 2022 while purchasing the fed animals from the cash market at the same time. The cash price of live cattle and the Aug 2022 CME Live Cattle futures on 02 Aug 2023 were 175.00 cents/lb. and 177.00 cents/lb., respectively. The call option on Aug 2023 CME Live Cattle with SP = 170 cents/lb. was trading at 1.50 cents/lb. on 02 Aug 2023. Consider two long hedging - strategies (1) full hedging with a Call option (with SP = 170 cent/lb.) on Aug 2023 CME Live Cattle futures; and (2) delta hedging with the same Call option (with SP = 170 cent/lb.) on Aug 2023 CME Live Cattle futures. A. If the beef packer hedged her full cash position, how many Call option contracts did she use? The size of fed cattle futures is 40,000 lbs. (5 Points) Answer: NFCF = B. Using the following table to calculate the beef packer's net price paid per pound of fed cattle from full hedging. Use the April 03 and August 02 cash prices, futures prices, and Call premiums as listed above. Fill all the gaps, calculate cash cost, gain/loss from hedging, and net price paid. (10 Pts) Date/Action Cash Market Futures Market Apr 03, 2023 CP 170.25 cents/lb. Aug. 23 CME LC, FP = 187.25 cents/lb. None Action Aug 02, 2023 CP 175.00 cents/lb. Action Buy/Sell (delete one) 500 fed animals @ 175.00 cents/lb. Long/Short Call with SP= c/lb. at C = cents/lb. FP=177.00 cents/lb. Exercise/Do not Exercise (cross one) Gain= Total Gain= Cost of purchasing the cattle = 105,000,000 cents Net Payment = Cash Cost - Gains from hedging Net price paid (cents/lb.) cents/lb. cents cents/lb. cents Q6. Suppose that a beef packer was planning in April 2023 to purchase 500 Live Cattle in Aug 2023. Expected fed cattle weight is 1200 lbs. per animal. On 03 Apr 2023, the cash price of fed cattle was 170.25 cents/lb., and the price of Aug 2023 CME Live Cattle futures was 187.25 cents/lb. The beef packer was worried that the cash price of fed cattle might increase in August and hedged using a Call option. So, he hedged against her input price risk. On 03 Apr 2023, the call option on Aug 2023 CME Live Cattle with SP = 170 cents/lb. was trading at 4.50 cents/lb. The beef packer placed the hedge on 03 Apr 2023, and lifted the hedge on 02 Aug 2022 while purchasing the fed animals from the cash market at the same time. The cash price of live cattle and the Aug 2022 CME Live Cattle futures on 02 Aug 2023 were 175.00 cents/lb. and 177.00 cents/lb., respectively. The call option on Aug 2023 CME Live Cattle with SP = 170 cents/lb. was trading at 1.50 cents/lb. on 02 Aug 2023. Consider two long hedging - strategies (1) full hedging with a Call option (with SP = 170 cent/lb.) on Aug 2023 CME Live Cattle futures; and (2) delta hedging with the same Call option (with SP = 170 cent/lb.) on Aug 2023 CME Live Cattle futures. A. If the beef packer hedged her full cash position, how many Call option contracts did she use? The size of fed cattle futures is 40,000 lbs. (5 Points) Answer: NFCF = B. Using the following table to calculate the beef packer's net price paid per pound of fed cattle from full hedging. Use the April 03 and August 02 cash prices, futures prices, and Call premiums as listed above. Fill all the gaps, calculate cash cost, gain/loss from hedging, and net price paid. (10 Pts) Date/Action Cash Market Futures Market Apr 03, 2023 CP 170.25 cents/lb. Aug. 23 CME LC, FP = 187.25 cents/lb. None Action Aug 02, 2023 CP 175.00 cents/lb. Action Buy/Sell (delete one) 500 fed animals @ 175.00 cents/lb. Long/Short Call with SP= c/lb. at C = cents/lb. FP=177.00 cents/lb. Exercise/Do not Exercise (cross one) Gain= Total Gain= Cost of purchasing the cattle = 105,000,000 cents Net Payment = Cash Cost - Gains from hedging Net price paid (cents/lb.) cents/lb. cents cents/lb. cents
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