Question

The Davis Company grows soybeans and processes them into soybean meal for eventual sale to food companies. Davis currently owns 10,000 tons of soybean meal, carried in their inventory at a cost of $3,400,000. Soybean meal trades on the spot markets for $350 per ton; three-month futures are selling for $363 per ton. Davis expects to sell the 10,000 tons for 90 days. On August 1, 2017, Davis sells 10,000 tons of soybean meal futures to be delivered on October 30, 2017, at the $363 price. The price of Davis’ futures contracts has advanced to $367 and the spot price is $354 on September 30, when the books are closed for interim reporting purposes. Davis closes out its short position on October 28, 2017, when the future price is $361 per ton and the spot price is $348.

Required (evaluate each separately):

4. How would you recommend Davis structure this transaction to maximize their return?

Answer 1

Davis compnay owns 10000 tons of soyabean meal at $3400000. It sold 3-month futures at $363 per ton on 1/8/2017 for 30/10/2017. It was seen that on the date of closure of interim books, The price of Davis futures contracts got advanced to $367 on 30th september, 2017.

It will record the futures loss on short futures contract on 30th september, 2017 at ($367-$363)=$4 per ton.

And, the company closes off its position 2 days earier on 28/10/2017 at $361 futures price to cancel the short futures position causing gain ($367-$361)=$6 per ton.

In short, the company earns a profit of ($363-$361)= $2 per ton *10000 tons- $20000.