Q1. On February 15 2022 Oregon Cereals has just negotiated a contract to buy 300,000 bushels of
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Question:
Q1. On February 15 2022 Oregon Cereals has just negotiated a contract to buy 300,000 bushels of corn. The price in the contract is the spot price of corn in July 2022.
You can use the following information
- Spot price of corn = 645 cents on February 15th
- July 22 futures price on CME = 642 cents
- Each CME corn futures contract is for 5,000 bushels.
- Assume the expiry date for July 2022 is the same as the date of the sales contract.
- Assume the grade of corn in the spot contract is the same as that underlying the futures contract.
- Explain clearly what hedging strategy Oregon Cereals will employ. Using your own numerical scenarios, illustrate how the company can set up a 'perfect hedge' today.
- Discuss any two (2) reasons why such a perfect hedge does not work in practice.
- Define the 'basis'. In the example above, explain whether Oregon Cereals would benefit from a 'stronger' or 'weaker' basis.
Related Book For
Operations Management
ISBN: 978-0071091428
4th Canadian edition
Authors: William J Stevenson, Mehran Hojati
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