QUESTION 1 You need 145,000 bushels of corn for your production operations in Ju

Question

QUESTION 1

You need 145,000 bushels of corn for your production operations in July. The futures contracts on corn are based on 5,000 bushels and are currently quoted at $5.19 per bushel for delivery in July. If you want to hedge your cost, you should _____ contracts at a cost of _____ per contract.

Sell 27; $25,950

Buy 27; $752,550

Buy 29; $25,950

Sell 29; $752,550

QUESTION 2

Following the previous question, if corn prices are $5.08 per bushel in July, what is the profit or loss on your futures position?

$397,100 loss

$397,100 gain

$15,950 gain

$15,950 loss

QUESTION 3

Suppose a financial manager buys call options on 45,000 barrels of oil with an exercise price of $31 per barrel. She simultaneously sells a put option on 45,000 barrels of oil with the same exercise price of $31 per barrel. Her net profit per barrel is _____ if the price per barrel is $29 and _____ if the price per barrel is $35.

-$2; $4

-$4; $2

-$2; $0

$0; -$2

Sell 27; $25,950

Buy 27; $752,550

Buy 29; $25,950

Sell 29; $752,550

Explanation / Answer

Question 1- option a. you should hedge equal anount.

Question 2- option d. there will be loss.

Question 3- option a.

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