4. Mrs. Smith is an orange juice distributor who, in January signed a contract to deliver 60,000 pounds of frozen orange juice to Churchill Downs on

Kentucky Derby Day (first Saturday of May). Mrs. Smith plans to buy the orange juice from a local distributor in May.

With the small profit margins, Mrs. Smith is afraid she might incur a loss if orange juice prices increase.

• Explain how Mrs. Smith could lock in her orange juice costs with a May frozen orange juice futures contract trading in January at F0 = $.90/lb.

The contract size is 15,000lbs.

• Show the net costs at the futures expiration date, from closing the futures position and buying 60,000lbs of frozen orange juice on

the spot market at possible prices of $.90/lb, and $1.0/lb.

• How much cash or risk-free securities would Mrs. Smith have to deposit to satisfy the initial margin requirement of 5%?