Freddie the Farmer currently has soybeans growing in his fields.Freddie's concerned that the price of soybeans may
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Freddie the Farmer currently has soybeans growing in his fields.Freddie's concerned that the price of soybeans may decline before he has the chance to take his output to market in 3 months.Freddie believes his crop yield will be 120,000 bushels of soybeans so he contacts a broker and is quoted a price of $3.50 for 3-month soybean futures contract (assume each contract is for 15,000 bushels).The broker informs Freddie that his initial margin will be $3,000 per contract with a maintenance margin of $1,500 per contract.Based on this information, answer the following questions(YOU MUST SHOW ALL CALCULATIONSTO RECEIVE CREDIT):
- Should Freddie go long or short in soybeans?Why?
- How many contracts should Freddie transact in?
- How much is each contract worth at inception?How much must Freddie remit to the broker (in total) at the time the futures contracts are purchased?
- If the futures price increases to $3.62 one month into the contract, what is the value of each contract?What will Freddie have to do per the terms of the futures contracts?
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