Topic 6

Chapter 25

Questions and Problems 4: Marking to Market

You are long 10 gold futures contracts, established at an initial settle price of $1,580 per ounce, where each contract represents 100 ounces. Over the subsequent four trading days, gold settles at $1,587, $1,582, $1,573 and $1,584, respectively Compute the cash flows at the end of each trading day, and computed your total profit or loss at the end of the trading period.

Questions and Problems 9: Hedging with Futures

Refer to Table 25.2 in the text to answer this question. Suppose today is August 8 2013, and your firm produces breakfast cereal and needs 140,000 bushels of corn in December 2013 for an upcoming promotion. You would like to lock in your costs today because you are concerned that corn prices might go up between now and December

a. How could you use corn futures contracts to hedge your risk exposure? What price would you effectively be locking in based on the closing price of the day?

b. Suppose corn prices are $4.80 per bushel in December. What is the profit or loss on your futures position? Explain how your futures position has eliminated your exposure to price risk in the com market.