Question

Assume that it is currently October 2009 and you trade futures contracts at the last price.

A wool grower anticipates a 22,000 kg clip in December. The grower decides to hedge the entire crop using futures. In December the grower shears 24,000 kg of wool, the auction price for wool is 800 cents per kg and December futures contracts are trading for 805 cents per kg.

1. Calculate the overall value of the clip including the profit or loss from futures trading.
2. Calculate the overall value of the clip in December if drought conditions limit the grower’s clip to only 1,000kg, the auction price for wool is 1,100 cents per kg and the December futures contracts price is 1,100 cents per kg.

ComdtyCT <HELP> for explanation. 1 <GO> to Configure Columns View Futures 1 1) Edit Columns WOOL FUTURE (SFE) Sydney Futures Exchange Delayed Futures Contracts 9/9 Ticker Last Changel 3) OLV9 Oct09 873.00 +2.00 4) OLZ9 Dec09 915.00 +8.00 5) OLGO Feb 10 unch 6) OLJO Apr 10 unch 7) OLMO Jun 10 unch 8) OLQO Aug 10 unch 9) OLVO Oct10 unch 10) OLZO Dec 10 unch 11) OLG1 Feb 11 unch 2) Chart on CCRV Contract Table Pricing Date 10/15/09 Sort By Expiration Session COMB Tot Volume 46 Open Int 731 Time Bid Ask Open Intl Volume Previous 10:41 866.00 880.00 142 18 871.00 11:17 910.00 920.00 556 28 907.00 10/14 915.00 945.00 917.00 10/14/ 900.00 935.00 914.00 10/14 810.00 914.00 10/14 810.00 895.00 10/14 895.00 10/14 895.00 10/14 895.00 28

Answer 1

Ans.@ Wool Future Bec.2009 lot size is 2500 kilogram Thus, do hedge anticipated 23,000 kg wool clip, the Grower need to sell a loft (2500 kg. x9 lodi - 2280 Last rate of sec. 2009 future is als Aurrent The sale value of contract is A $205.88 (Value of I lot @ 915 cent comes to A$22.88 multiply with 4) This is value of hedge $205.88. Now, upon expiration of Dec, 2009 contract there are two options in the hands of growes namely o deliver the goools (wool) on expiration ar ® do not deliver tuil go for auction. Undes option ③ grower get good price at the time of hedging and has notional profit will be us aus. cont pas lot. Thus, fortal notional jour of uit 4 915 - 800 Austral Onder option is grower can go for auction and book the said profit under option and at the same time his goods (wool) will be with him. 6 Now, if drought canalition limit the grower clips to only 1000 kg. then - Groves will have to out for auction of all 9 lots in future hasket and deliver locokg wood in cash market.

prower will have to bear loss Ta floris case, as andes. Hedge price of future contract at 205.88 lessi Auction Price 1100 cant at 247.50 . for a lots of 2500kg each a (41.62) Loes to growes Less: Sale proceeds of mearg. At wool @ 110o cent Ax (3162) Therefore nel loss to groves will be a $31.62.