Question

1) Nestles company plans to purchase 750 metric tons of cocoa in six month.

Nestles fears that the price of cocoa will increase before they acquire the

cocoa. Nestles wants to lock in the price it will pay for cocoa. Cocoa futures

contract is traded at the New York Board of Trade. Each contract is for 10

metric tons of cocoa. Cocoa currently is at $3,700 per ton. Cocoa futures

price with six

months

to expiration is $3,740 per ton. Nestles decides to long

the cocoa future.

Six months later, the price of cocoa increases to $3790, and the futures price also

increases to $3,825.

Questions:

A) How many contracts are required?

b) How did this long hedge perform? (That is, what’s the loss on the spot

purchase vs the gain on future contracts?)

2)

The silver futures contract for December 2020 (one year from now) is

currently quoted at a spot price of $14 per ounce, and the risk-free rate is at

2.5%.

Questions:

a) What’s

the silver futures price (F) for December 2020 according to spot

future parity?

b) Calculate the basis between these two futures.

Answer 1

A) How many contracts are required?
750 MT/10 lot size	=75 contracts
b) How did this long hedge perform?
Futures price	3740
Spot price at expiry	3790
Profit	50
a) the silver futures price (F) for December 2020 according to spotfuture parity?
Futures Price = Spot Price × (1 + Risk-Free Interest Rate – Income Yield)
14*(1.025)	14.35
b) Calculate the basis between these two futures.
Basis is the difference between both the prices
14.35-14	0.35