Futures contract specifications for gold and lean hogs are shown below. Use the
ID: 2767462 • Letter: F
Question
Futures contract specifications for gold and lean hogs are shown below. Use the table of futures market data dated June 27, 2015 to answer questions 1 and 2 below.
OPEN
HIGH
LOW
SETTLE
Gold – 100 troy ounces; Dollars per ounce
July 2015
1571.40
1581.00
1563.50
1577.60
Aug
1572.60
1584.60
1563.10
1578.40
Oct
1574.50
1584.30
1566.00
1580.60
Dec
1576.50
1585.90
1568.50
1582.70
Lean Hogs – 40,000 pounds; Cents per pound
July 2015
94.55
96.20
94.40
95.57
Aug
89.80
92.00
89.70
91.70
Oct
79.85
81.30
79.85
81.05
Dec
77.55
78.35
77.55
78.30
2. Suppose today is June 27, 2015 and the Dillons Grocery Store company is projecting its ham needs for the Thanksgiving holiday. The company would like to lock in its inventory cost and usually takes shipment of hams on the last day of October. The company anticipates needing 1.2 million pounds of ham for the season. The lean hog contract is the only possibility for hedging.
a) What contract month and position should the company take? (Be sure to consider the last trading day for each contract listed on the Chicago Mercantile Exchange)
b) What price are they effectively locking in based on the SETTLE price of the day?
c) Suppose lean hog futures are trading at $75.40 per pound on October 31. What is the profit or loss on the futures position?
OPEN
HIGH
LOW
SETTLE
Gold – 100 troy ounces; Dollars per ounce
July 2015
1571.40
1581.00
1563.50
1577.60
Aug
1572.60
1584.60
1563.10
1578.40
Oct
1574.50
1584.30
1566.00
1580.60
Dec
1576.50
1585.90
1568.50
1582.70
Lean Hogs – 40,000 pounds; Cents per pound
July 2015
94.55
96.20
94.40
95.57
Aug
89.80
92.00
89.70
91.70
Oct
79.85
81.30
79.85
81.05
Dec
77.55
78.35
77.55
78.30
Explanation / Answer
Answer:
a) The company should take October Month settlement Contract and the company is buying the lean hog for its inventry to protect the prices should take the short position (selling of lean hog).
b) The company should purchase short futures contract $ 81.50 Cents per pound.
c) Lean hog futures are trading at = $75.40 cents per pound
Contracted futures at settle = $81.05 cents per pound
Size of contract = 40,000 pounds
Profit on settlement of Contract = 40000*30 Contracts*($81.05-$75.4)/100
Profit on settlement of Contract = $67,800/-.
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