A food company is planning to purchase 5,000,000 pounds of beef in six months. The company is
Question:
A food company is planning to purchase 5,000,000 pounds of beef in six months. The company is concerned about changes in the price of beef. Your assignment is to construct a futures contract hedge to protect the company’s cost. The current wholesale price of beef is 106 Cents per pound.
The livestock futures contracts are for 40,000 pounds. The futures contract quoted price is Cents per pound. The coefficient of correlation between livestock and beef is 0.93. The standard deviation of livestock and beef are 56.35 and 68.25 respectively.
The available futures contracts are This information was downloaded from CME Group website:
Month | Last (cents) | Change | Prior Settle | Open | High | Low |
Aug-18 | 106.075 | -0.3 | 106.375 | 106.85 | 107.325 | 105.775 |
Oct-18 | 108.65 | -0.975 | 109.625 | 109.9 | 110.275 | 108.3 |
Dec-18 | 112.825 | -0.875 | 113.7 | 113.775 | 114.05 | 112.4 |
Feb-19 | 116.325 | -0.2 | 116.525 | 116.5 | 116.775 | 115.35 |
Apr-19 | 117.825 | -0.425 | 118.25 | 118.45 | 118.45 | 117.125 |
Jun-19 | 110.65 | -0.5 | 111.15 | 111.175 | 111.175 | 110 |
Aug-19 | 109.675 | -0.325 | 110 | 109.7 | 110 | 108.95 |
Oct-19 | 111 | -0.6 | 111.6 | 111 | 111 | 111 |
Part a. Describe the Repo rate.
Part b. Describe the Fed Funds rate