Suppose you are a dealer in sugar. It is September 26, and you hold 112,000 pounds of

Question:

Suppose you are a in sugar. It is September 26, and you hold 112,000 pounds of sugar worth $0.0479 per pound. The price of a futures contract expiring in January is $0.0550 per pound.
Each contract is for 112,000 pounds.
a. Determine the original basis. Then calculate the profit from a hedge if it is held to expiration and the basis converges to zero. Show how the profit is explained by movements in the basis alone.
b. Rework this problem, but assume that the hedge is closed on December 10, when the spot price is $0.0574 and the January futures price is $0.0590.
4. a. Define the minimum variance hedge ratio and the measure of hedging effectiveness. What do these two values tell you?
b. What is the price sensitivity hedge ratio? How are the price sensitivity and minimum variance hedge ratios alike? How are they different? Dealer
A dealer in the securities market is an individual or firm who stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price). A dealer seeks to profit from the spread between the...