Futures Markets 4.a. In January, Julia purchased two May live cattle futures con
ID: 1113859 • Letter: F
Question
Futures Markets
4.a. In January, Julia purchased two May live cattle futures contracts. One contract is 40,000 lbs. of live cattle. It is currently March. In March, Julia can fulfill her contract obligations by
(a) purchasing two May live cattle futures contracts
(b) selling two May live cattle futures contracts
(c) delivering 80,000 lbs. of live cattle to a futures transaction point
(d) accepting delivery of 80,000 lbs of live cattle at a futures transaction point.
Write down the letter(s) of all answers that are correct.
4.b. Use the following table of prices to calculate the profits of a speculator who sells three November soybean futures contracts on May 12 and offsets those contracts on November 5. Show your work.
May 12
Nov 5
November Soybean futures contract price (one contract=5000 bushels)
$6.23/bushel
$7.50/bushel
Soybean Spot Price
$7.15
$8.25
4.c. Finding that this speculator lost money, why might they have rationally chosen to offset their earlier sell contracts on November 5? This will guarantee a loss, so why not wait?
4.d. If the person in 4.b. was hedging (i.e., someone who was initially long in soybeans), how would this change their actions on Nov 5? Show how their profits would have changed, to contrast with the speculator in 4.b.
May 12
Nov 5
November Soybean futures contract price (one contract=5000 bushels)
$6.23/bushel
$7.50/bushel
Soybean Spot Price
$7.15
$8.25
Explanation / Answer
4a)Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset.so,in this case julia, who is the buyer of futures can fulfill her contract by (d) accepting delivery of 80,000 lbs of live cattle at a futures transaction point.
4b) A speculator sells (shorts) three nov soyabean future contracts on may 12 and offsets those on nov 5.
now, since futures are financial contracts onligating the seller to sell an asset he can earn profit when prices go down.but here in the table we see that the commodity's price is going up hence the speculator is bound to make a loss.
now on nov 5 the soyabean spot price is 8.25$ per bushel but he sold three contracts on may12 at contract price 6.23$ per bushel.he sells three such contracts .so,
loss=3*5000*(8.25-6.23)=$30300
4 c) if further rise in prices of soyabean is antcipated it is better to sell it now and make lesser loss than wait.
4d)if person in 4b. was hedging by buying an option.this gives him an upper edge and does not sell the product when prices go up and thus foregoes just the premium amount to buy that option , by this he can save himself from making losses
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