Imagine that you are a feedlot operator looking to hedge against rising prices for feeder cattle and
Question:
Imagine that you are a feedlot operator looking to hedge against rising prices for feeder cattle and thus increasing cost to place cattle. It is currently December and you are looking to place/purchase cattle in March, 135 head or 50,000 lbs to be exact. You suspect prices are going to rise over this period.
Current March CME Feeder Cattle futures contracts are trading at $103/cwt. You expect a basis in March of -2.00.
a. Calculate a target or bid price.
b. Based on your target or bid price, if a forward contract was offered to you at a price below your target or bid price, would you accept the contract?
c. Based on your target or bid price, if a forward contract was offered to you at a price above your target or bid price, would you accept it?
d. In March, the future contract price has gone up and your basis is -1.9. Fill in the table below to determine your net price received.
Basis | Futures price | Cash price | Futures gain/loss | Net price received |
-1.9 | 105.9 |
e. Fill in the table below.
Purchase of futures contract | |
Purchase in cash/spot market | |
Sale of futures contracts | |
Net position |
f. What was the change in expected profit as a result of hedging?
Managing Business Ethics Making Ethical Decisions
ISBN: 9781506388595
1st Edition
Authors: Alfred A. Marcus, Timothy J. Hargrave