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3. A purchasing manager of a food company is worrying an increase in corn price will have a negative impact on the profit mar

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Answer #1

Sub part a:

The purchasing manager needs corn for consumption by the food company. The manager want to avoid the rising prices as it will reduce the profit because of higher outlay of money to purchase corn. Hence the manager will buy the future contract with is an obligation to buy corn at a fixed price (decided today ) in the future.

Hence, the manager will go long on the future contract.

Sub part b:

Initial investment = $15,000 (This is the initial margin that is kept at the Brokerage firm

The futures price = 390 cents/lb

After 3 months price of corn = 430 cents/lb

Total profit if the manager liquidates the contract = (430 - 390) cents/lb * 50,000= 40 cents/lb * 50,000 = $20,000

Manager will make $20,000 on initial investment of $15000 which is a return of $20,000/$15000 *100 = 133.33%

Answer: percentage return on invested capital = 133.33%

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