1. MacDonald\'s Hamburger Company wants to hedge its anticipated purchase of 300
ID: 1188757 • Letter: 1
Question
1. MacDonald's Hamburger Company wants to hedge its anticipated purchase of 300,000 pounds of hamburger with the live cattle futures contract (40,000 lb. of live cattle per futures contract). The estimated relationship between the price that MacDonalds pays for its hamburger and the live cattle futures price is S($/lb.) = a + b F($/lb.) where b is 0.4. A properly constructed cross hedge is established by (buying/selling) (How many) live cattle futures contracts
2. Archer Daniels Midland (ADM) wants to hedge an anticipated sale of 2,880,000 pounds of vegetable oil to various major salad dressing manufacturers with the soybean oil futures contract (60,000 lb. of soyoil per futures contract). The estimated relationship between the price that ADM receives for its vegetable oil and the soybean oil futures price is S($/lb.) = b F($/lb.) where b is 0.25. A properly constructed cross hedge is established by (buying/selling) (How many) soybean oil futures contracts.
3.America West Airlines wants to wants to hedge its anticipated purchase at various airports of 157.5 thous pounds of jet fuel with the heating oil futures contract (42,000 gal of heating oil per futures contract). The estimated relationship between the price that America West pays for jet fuel and the heating oil futures price is S($/lb.) = a + b F($/gal) where b is 0.8. A properly constructed cross hedge is established by (buying/sellingbuyingselling) (How many) heating oil futures contracts.
4.Strip Mining Coal Co. wants to wants to hedge its anticipated coal production of 48 car loads of coal with the natural gas futures contract (10,000 MMBtu per natural gas futures contract). The estimated relationship between the price that Strip Mining Coal receives for its coal and the natural gas futures price is S($/carload) = a + b F($/MMBtu) where b is 2500. A properly constructed cross hedge is established by (buying/selling) (How many) natural gas futures contracts.
5. The California State Retirement Fund has in its portfolio $958.333333333333 thous in stocks in several copper mining companies. Fearing a decline in the value of these stocks caused by a decline in the price of copper, the fund manager decides to hedge the copper mining portion of its portfolio by using the copper futures contract (25,000 pounds per copper futures contract). The estimated relationship between the stock price and the copper futures price is S($ value of the fund in thous) = a + b F($/pound) where b is 600. A properly constructed cross hedge is established by (buying/selling) (How many) copper futures contracts.
6. Sparks Electrical has just won the contract to wire a new high rise office building to be built in Phoenix. The contract requires the purchase and installation of 2,500 thousand feet of copper wire. Fearing an impending increase in the price of copper wire, Sparks wants to hedge its contract by using the copper futures contract (contract specifications per problem 5). It is estimated that the price of copper wire increases by 200 cents per thousand feet for each one cent increase in the copper futures price. A properly constructed cross hedge is established by (buying/selling) (How many) copper futures contracts.
Explanation / Answer
6)
Copper wire requiredfor the project 1125 thousand feet Relation between stock price and copper future price S= a + bF Increase in copper wire is 4 $ per thousand feet for 0.01 $ increase in futures Total futures contract to buy is Total money to hedge divided by valure per future contract Assuming a as 0 we have S = 250 F The company need to hedge its position so that it is not impacted by the increase in the spot rate Th company will enter into a long(buy) futures contract Total money involved in thousand $ is 703.125 Converting 1125 thousand feed into $/pound i.e.1125*250 and dividing by 400 Per future contract 25 thousand pounds So total futures contract the company must purchase is 28Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.