3. Hedging using futures Suppose a farmer is expecting that her crop of oranges

Question

3.

Hedging using futures

Suppose a farmer is expecting that her crop of oranges will be ready for

harvest and sale as 150,000 pounds of orange juice in 3

months time. Suppose each orange juice futures contract is for 15,000

pounds of orange juice, and the current futures price is F0=118.65 cents-per-pound.

Assuming that the farmer has enough cash liquidity to fund

any margin calls, what is the risk-free price that she can guarantee herself.

Please submit your answer in cents-per-pound rounded to two decimal places. So for example, if your answer is 123.456, then you should submit an answer of 123.47.

Explanation / Answer

Current Futures Price = 118.65 cents/pound

Each orange juice futures contract = 15,000 pounds

Contracts required = 150,000 / 15,000 = 10 contracts

Value for 150,000 pounds = 150,000 X 0.11865 = $ 17,797.50

Value per contract = $ 17,797.50 / 10 = $ 1,779.75

Value spread over three months (risk free price) = $ 1,779.75 / 3 = $ 593.25

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