You are a sugar dealer anticipating the purchase of 250,000 pounds of sugar in three months. You
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You are a sugar dealer anticipating the purchase of 250,000 pounds of sugar in three months. You are concerned that the price of sugar will rise, so you take a long position in sugar futures. Each contract covers 112,000 pounds, and so, rounding to the nearest contract, you decide to go long in two contracts. The futures price at the time you initiate your hedge is 19.56 cents per pound. Three months later, the actual spot price of sugar turns out to be 20.65 cents per pound and the futures price is 20.85 cents per pound.
a. Determine the effective price at which you purchased your sugar. How do you account for the difference in amounts for the spot and hedge positions?
b. Describe the nature of the basis risk in the long hedge.
Dealer A dealer in the securities market is an individual or firm who stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price). A dealer seeks to profit from the spread between the...
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a Given information Sugar 250000 pounds for three months 112000 pounds The rest of 138000 Future price hedge price 1956 cent per pound Three months la...View the full answer
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