The current spot price of wheat is $4.865 per bushel and the current forward/futures price of...

 

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The current spot price of wheat is $4.865 per bushel and the current forward/futures price of wheat is 475.5 cents per bushel. (The spot price of wheat is quoted in dollars per bushel and the futures price of wheat is quoted in cents per bushel.) Consider a 9-month contract on wheat and assume that the risk-free interest rate is 2 percent per year with continuous compounding and storage costs of wheat are 3 percent per year with continuous compounding. Answer the following questions. 13. a. What is the convenience yield of wheat? b. Is the futures price in contango or normal backwardation? Farmer D. Jones has a crop of grapefruit that will be ready for harvest and sale as 150,000 pounds of grapefruit juice in 2 months. Jones is worried about possible price changes, so he is considering hedging. There is no futures contract for grapefruit juice, but there is a futures contract for orange juice. His son. Gavin, recently studied minimum variance hedging and suggests it as a possible approach. Currently, the spot price of orange juice is $1.20 per pound and the spot price of grapefruit juice is $1.18 per pound. The May futures price of orange juice is 125.00 cents per pound and one contract is for 15.000 pounds of orange juice. Gavin estimates that the relation, in dollars, between the spot price of grapefruit juice (SG) and the futures price of orange juice (Fo) is given by the equation: SeaFo + B2(Fo) where a = 0.60 and = 0.50. Answer the following questions. a. Compute the optimal number of contracts for a minimum variance hedge. Do not round in this question (i.e.. keep all numbers after the decimal point). b. Compute how the hedge performs if the May orange juice futures price decreases to 100.00 cents per pound or increases to 150.00 cents per pound at the end of April. Do not round in this question (i.e.. keen all numbers after the decimal point). The current spot price of wheat is $4.865 per bushel and the current forward/futures price of wheat is 475.5 cents per bushel. (The spot price of wheat is quoted in dollars per bushel and the futures price of wheat is quoted in cents per bushel.) Consider a 9-month contract on wheat and assume that the risk-free interest rate is 2 percent per year with continuous compounding and storage costs of wheat are 3 percent per year with continuous compounding. Answer the following questions. 13. a. What is the convenience yield of wheat? b. Is the futures price in contango or normal backwardation? Farmer D. Jones has a crop of grapefruit that will be ready for harvest and sale as 150,000 pounds of grapefruit juice in 2 months. Jones is worried about possible price changes, so he is considering hedging. There is no futures contract for grapefruit juice, but there is a futures contract for orange juice. His son. Gavin, recently studied minimum variance hedging and suggests it as a possible approach. Currently, the spot price of orange juice is $1.20 per pound and the spot price of grapefruit juice is $1.18 per pound. The May futures price of orange juice is 125.00 cents per pound and one contract is for 15.000 pounds of orange juice. Gavin estimates that the relation, in dollars, between the spot price of grapefruit juice (SG) and the futures price of orange juice (Fo) is given by the equation: SeaFo + B2(Fo) where a = 0.60 and = 0.50. Answer the following questions. a. Compute the optimal number of contracts for a minimum variance hedge. Do not round in this question (i.e.. keep all numbers after the decimal point). b. Compute how the hedge performs if the May orange juice futures price decreases to 100.00 cents per pound or increases to 150.00 cents per pound at the end of April. Do not round in this question (i.e.. keen all numbers after the decimal point).

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Part a Wheat Convenience Yield and Futures Price a Convenience Yield The convenience yield CY represents the additional return earned by holding the p... View the full answer