Question

1. Back in May 2020, an ethanol plant’s risk manager looked at futures prices and considered a hedge to lock in a price on part of her new-crop corn acquisition planned for mid-to-late October 2020. She saw that the December 2020 futures contract was trading at $3.20/bushel and she knew that the basis in mid-October—when she expected to take delivery of the corn in question and to lift the hedge (i.e., to offset her futures position)—has typically (most years) been about 25 cents under December. What net price did she, back in May, expect to pay in October 2020 if she placed this hedge?

d. $2.80/bu b. $2.95/bu c. $3.20/bu a. $3.45/bu e. None of the above

Please explain briefly.

2. Suppose that the manager did place the hedge in May. We are now on October 15th, 2020 and the plant has just taken delivery of the corn whose price she hedged. She is now managing price risk for the next corn intake, for mid-February, and is considering using a futures hedge to lock in a price. Which maturity should she use?

a. December 2020 (expires Dec. 15) b. March 2021 (expires Mar. 15, 2021) c. May 2021 (expires May, 2021) f. Not enough information

Please explain briefly.

3. Suppose that the manager did place the hedge using the March 2021 contract. March 2021 corn futures are trading at $4.07’4/bushel while May 2021 corn futures are trading at $4.08’4/bu. She knows that cash prices in February are usually (i.e., most years) approximately 15 cents below March futures prices and 25 cents below May futures prices. What net price does she expect to pay if she places this hedge?

a. $3.92/bu b. $4.02/bu c. $4.12/bu d. $4.03/bu e. None of the above f. Not enough information

Please explain, including any assumptions you make on the way.

Answer 1

Answer:-1

The December future price for hedge will be :- $3.20 . Bessel

when she takes delivery in oct dec future is under 25 % for oct

=3.20-.25=2.95

Hence option B 2.95 is correct one

(2) March 15 expires is correct one

Explain : As the delivery is required to be at in the february and hence hedging should be by the future of march 15 expires and every other options are incorrect.

Answer: (3)

15 % Below of march future =4.07-.15=3.92

25 % below of may future =4.08-.25=3.83

She needs delivery in the February and hence she expects to pay 3.92 / Bushel if she places pledge

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