Q10. Suppose that you have fully hedged your cattle on feed by trading December
ID: 2618837 • Letter: Q
Question
Q10. Suppose that you have fully hedged your cattle on feed by trading December 2017 CME live cattle futures contract. You placed hedge on 02 June 2017 by trading (selling or purchasing) NFC-QQ number of December futures contract (fil the blank spaces in the following table). You lifted hedge on 27 October 2017 by trading (selling or purchasing) the same number of December futures contract (fill the blank spaces in the following table). The cash and futures prices during the time of placing and lifting hedge are listed in the following tablc. By filling the blank spaces in the table, show the hedging strategy and calculate the revenue from selling the live animals in the local cash market, gain/loss from the futures position, total revenue, and net realized price per pound of live animal. (10 points) Date/Action Cash Market Futures Market June 02, 2017 106.10 cents/lb. FP 114.20 centslb Action Dec. 16 CME LC contracts @ cents/lb Oct 27, 2017 CP 110.90 cents/tb FP 116.40 cents/lb. 1,000 cattle (1,200,000 Oct. 16 CME LC Action contracts Q centslb. Gain Loss- Return from Cash Market Return from Futures Market Net Return from Cash and Futures Markets Net realized price of live cattle (cents/Tb).Explanation / Answer
Answer
FIlling first blank that is under future market dated 2nd June.
since we have cattle in our hand and we have to sell it in near future.
So we must be afraid of falling in cattle prices
Therefore we are going to short futures so if the prices fall then we profit from such fall and create a hedge for us
so blank will be filled like this
Short Dec 16 CME LC contract @ 114.20 cents/lbs
Filling the second blank
Which is under cash market dated 27 oct.
It is normal we just sold cattle in cash market
So blank will be filled like this
Sell 1000 (1,200,000 lbs) cattle @ 110.90 cents/lbs
so total amount will be = 1,200,000 @ 110.90 = 133,080,000
Now filling the third blank
that is under futures market dated 27 oct
since we sold future on 2 June now we will buy future to complete the transaction.
Long oct 16 CME LC contract @ 116.40
Now lastly
the last four blanks will be filled like this
Return from cash market = (110.90-106.10)1,200,000 = 5,760,000 = 4.328%
Return on Futures market = (114.20 - 116.40) 1,200,000 = - 2,640,000 = -1.92%
Net return from both market = 5,760,000-2,640,000 = 3,120,000
Net realized price of cattle = X * 1,200,000 = (110.90*1,200,000) - 2,640,000 = 108.7
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.