On 15th February a food manufacturer has sold forward 100,000 malting barley bushels to a brewery company
Question:
On 15th February a food manufacturer has sold forward 100,000 malting barley bushels to a brewery company at $4.60 per bushel on 20th June this year. Since the merchant will not be making the delivery for four months, the firm will purchase the barley on 1st June. The merchant could buy on 15th February a 15th June barley futures contract at $4.50 per bushel for 100,000 bushels, or alternatively, could buy a 15th June call option the 15th February to hedge its 100,000 malting barley bushels sold forward. The local spot price is $4.30 per bushel on 15th February, while the strike price is $4.50 per bushel and the call option premium paid is $0.20/bushel. In the scenario the 1st June the local price is $4.80 per bushel, depending on the case, the manufacturer either could sell that day the 15th June barley futures contract at $4.80 per bushel for 100,000 bushels or “close out” the position of the 15th June call option. Based on this information:
Prepare the hedging tables for both alternative hedging instruments, including the basis (in the case of future contract), the net gain or loss in the spot and futures/options markets, and the net hedged selling price.
Financial Reporting and Analysis
ISBN: 978-0078025679
6th edition
Authors: Flawrence Revsine, Daniel Collins, Bruce, Mittelstaedt, Leon