In July of 2016, Sue enters into a forward agreement with Ann to lock in a sales

Question

In July of 2016, Sue enters into a forward agreement with Ann to lock in a sales price for wheat. Sue anticipates selling 300,000 bushels of wheat at the market in March of 2017. Ann agrees to a forward with Sue to buy 300,000 bushels at $5.20. Sue’s cost for the wheat is $4.90 per bushel. The contract allows for net settlement.

REQUIRED

1. Determine the economic income of the sales transaction at various price levels at maturity for the forward. Consider market prices of $5.00, $5.10, $5.20, $5.30, and $5.40. Make a table similar to the Gre copper example found in the chapter.

Explanation / Answer

Difference(c=a-b) {unrealized gain/(loss)}

+

Realised Gain=$5.20-$4.90=$0.30

$ 0.20 +$0.30

$0.10 + $0.30

$0 +$0.30

($0.10) + $.30

($0.20) +$0.30

*negative income is denoted in ()

Necessary modifications could be done to make it suitable as Gre copper example

Do give your feedback!! Happy Learning :)

Contracted price(a) Price level at maturity(b)

Difference(c=a-b) {unrealized gain/(loss)}

+

Realised Gain=$5.20-$4.90=$0.30

Economic income (c*300000 bushels) $5.20 $5.00

$ 0.20 +$0.30

$150000 $5.20 $5.10

$0.10 + $0.30

$120000 $5.20 $5.20

$0 +$0.30

$90000 $5.20 $5.30

($0.10) + $.30

$60000 $5.20 $.5.40

($0.20) +$0.30

$30000

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