Agnes Chin is the chief financial officer of Grains Corp., an established agricultural commodities firm. The headquarters of Grains Corp. is located in Chicago.
It is now January and Agnes is working on two large deals that are coming up in the current year:
-Grains Corp. is going to purchase 100,000 bushels of wheat in 10 months’ time so as to meet its orders upstream.
-Grains Corp. is finally going to sell ofits 50,000 bushels of soybeans that has been in storage for the past 6 months. The transaction is to take place in 3
months’ time.
Prices in these transactions have not been fixed and hence they are risks that Agnes has to consider hedging. She checks the market data as presented below:
Agnes needs to analyse the nature of commodity price risk and the need for hedging this risk in the transactions. Help Agnes in her analysis by answering the following multiple choice questions:
(a) The 3-month forward price for the soybeans that is implied by the data is best approximated by
(i) 400,000
(ii) 500,000
(iii) 600,000
(b) Agnes notices that the 3-month futures price for soybeans that is traded in the market is significantly higher than the implied 3-month forward price. She may
take advantage of the arbitrage opportunity by
(i) selling 3-month soybeans futures to exactly hedge the price for the current storage of soybeans
(ii) buying more soybeans at spot, storing it for 3 months and buying 3-month soybeans futures
(iii) buying more soybeans at spot, storing it for 3 months and selling 3-month soybeans futures
(c) The futures contracts traded at the exchange expire in the months listed here:
March (H), May (K), July (N), September (U) & December (Z)
Is it possible to build a perfect hedge for the purchase of wheat with wheat futures contracts?
(i) Yes
(ii) No and she should enter into the September contract
(iii) No and she should enter into the December contract
(d) Judging from the data, the current state of the commodity market is likely to be
(i) backwardation
(ii) normal backwardation
(iii) contango
(e) If Agnes were to go long on the wheat futures, she will most likely notice that the market price on her futures contracts will
(i) gradually go down if the market remains generally calm
(ii) stay unchanged if the market remains generally calm
(iii) fluctuate significantly even while the market remain generally clam