Assignment- Derivatives & Risk Management
Case
It is January 1, 2017 and Mary Farmer a wheat farmer in Kansas is planning for her September harvest. She is expecting to produce 50,000 bushels and projects her costs to be $30,000. The weather forecast is calling for normal temperatures and average rainfall during the growing season. Farmer calls her broker in Chicago to get an update on the wheat futures market. The wheat futures market pricing snapshot is listed below. One contract equals 5,000 bushels of wheat and is quoted in cents per bushel (e.g. 445 = $4.45/5,000 bushels). She is contemplating whether she should use the futures market. The current spot price for wheat is $3.90/5,000 bushels.
|
Month
|
Options
|
Charts
|
Last
|
Change
|
Prior Settle
|
Open
|
High
|
Low
|
Volume
|
Hi / Low Limit
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Updated
|
Legend:
Options
Price Chart
|
|
DEC 2016
|
DEC 2016
|
Show Price Chart
|
-
|
-
|
390'6
|
-
|
-
|
-
|
0
|
No Limit
|
08:33:39 CT
09 Dec 2016
|
|
MAR 2017
|
MAR 2017
|
Show Price Chart
|
406'2
|
-2'0
|
408'2
|
409'0
|
409'6
|
406'0
|
12,854
|
438'2 / 378'2
|
08:47:40 CT
09 Dec 2016
|
|
MAY 2017
|
MAY 2017
|
Show Price Chart
|
417'2
|
-1'4
|
418'6
|
419'4
|
420'0
|
416'2
|
2,835
|
448'6 / 388'6
|
08:47:20 CT
09 Dec 2016
|
|
JUL 2017
|
JUL 2017
|
Show Price Chart
|
429'6
|
-0'4
|
430'2
|
430'6
|
432'0
|
428'4
|
2,620
|
460'2 / 400'2
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08:47:33 CT
09 Dec 2016
|
|
SEP 2017
|
SEP 2017
|
Show Price Chart
|
445'0
|
+0'6
|
444'2
|
445'4
|
445'4
|
442'4
|
305
|
474'2 / 414'2
|
08:46:30 CT
09 Dec 2016
|
The next day Farmer gets a visit from Han Changfu who is a buyer for a co-operative in China. Farmer has known Changfufor a couple of years and has heard that other farmers in the area have sold their crops to him. But, Farmer has never done business with him.Changfu offers a contract to buy Farmer's wheat crop for September delivery for 450'0 per 5,000 bushels. The current exchange rate is 0.14 Yuan to U.S. Dollar.
Discuss the background of the case and the pros and cons of Mary Farmer's options for selling her wheat. Discuss how changes in wheat prices will affect her profit and loss in each transaction. Also, discuss Han Changfu's risks, returns and other issues he may face.
Attachment:- Derivatives-Case.rar