As a soybean equipment supplier, how should you:
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Step 1: Define soybean futures precisely — soybean futures are standardized exchange-traded contracts that commit a buyer and a seller to deliver a specified quantity and quality of soybeans at a predetermined price on a specified future date. Show more…
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Suppose you are the buying agent for a soybean crushing business that produces biodiesel for the alternative fuel industry. Part of your job responsibilities is to ensure the company has an adequate supply of soybeans so that the supply stream is not interrupted, and of course, you want to minimize the cost of the soybeans and manage future price risk. Management has asked you to evaluate long hedges for the purchase of soybeans 6 months in the future. To keep this simple, you are asked to limit your evaluation to only 5,000 bushels of soybeans (1 contract). In this evaluation, you will set up a hedge using only futures contracts, then compare this to a hedge using soybean call options. Below are the details required for this analysis: Beginning of Hedge (Current Time Period) Cash price of soybeans available for immediate delivery: $8.50/bushel Futures Price of Soybeans on a contract six months in the future: $8.80/bushel Call Option Premium on the above soybean contract with the $8.80/bushel strike price: $0.10/bushel End of Hedge 6 months later Cash price of soybeans available for immediate delivery: $9.70/bushel Futures Price of Soybeans on the original contract: $9.91/bushel Call Option Premium on the above soybean contract with the $8.80/bushel strike price: $1.23/bushel Assume no transaction fees with the brokers. At the end of the hedge and assuming the futures positions were offset, what would have been the company's final estimated cost per bushel using futures contracts only? (10 Points) At the end of the hedge, what would have been the company's final estimated cost per bushel using the soybean call options? Assume you offset your original call position and kept any gains or losses from the option transaction. (10 Points) At the end of the hedge, what would have been the company's final estimated cost per bushel assuming the option was used to create a position in the futures market, and then this position was immediately offset using the end of hedge futures price? (10 Points) As you present the outcomes to management, one manager asks what hedging approach should be taken in the future if some major trade deals in the works with China and other nations collapse, causing the price of soybeans to dramatically fall even lower than the beginning of the hedge futures price? (5 Points)
Akash M.
A large farming company likes to firm up prices for its agricultural products. It anticipates harvesting and selling 1,000,000 bushels of a particular commodity in six months. News reports and changes in forecasts cause fluctuations in the spot price for the commodity. The current spot price is $5.00 per bushel. Futures contracts are available at $4.75 per bushel. A noninterest-bearing margin deposit of $200,000 is required if futures contracts covering the entire 1,000,000 bushels are sold. The company's current cost of borrowing is 4% per annum. (b) Calculate the spot price six months hence at which the company is indifferent between not hedging and hedging with futures contracts. Round per bushel price three decimal places. Per bushel price Answer Assume the spot price stands at $5.25 per bushel when 1,000,000 bushels of the commodity are harvested and sold. Explain, using calculations as needed, how the company's financial statements will differ without hedging compared to hedging with futures contracts. Remember to use negative signs with your answers when the financial statement effect is a credit. Financial Statement Effects Debit (Credit) No Hedge Hedge with Futures Contracts Difference Cash Answer Answer Answer Inventory Answer Answer Answer Gain on harvest Answer Answer Answer Loss on futures contracts Answer Answer Answer Interest expense Answer Answer Answer
You own two different plots of land, and you have to decide how many bushels of corn and soybeans to grow. You'll base your decision on the market price of corn and soybeans, as well as the marginal costs of growing on each farm, which varies depending on the arability of the land. Because harvesting requires different inputs, you can only grow one type of food in each area. Because you would pay the same amount for the land and farm equipment regardless of which crop you grow, the fixed costs are the same across industries. For simplicity, assume the fixed costs equal zero. In plot 1, the marginal costs are given by: Corn: MC = 3 + 0.2Q Soybeans: MC = 2 + 0.3Q Variable costs are given by: Corn: VC = 3Q + 0.1Q^2 Soybeans: VC = 2Q + 0.15Q^2 In plot 2, the marginal costs are given by: Corn: MC = 2 + 0.2Q Soybeans: MC = 5 + 0.1Q Variable costs are given by: Corn: VC = 2Q + 0.1Q^2 Soybeans: VC = 5Q + 0.05Q^2 Given the above information, answer the following questions: Hint: Review the following section, 8.3, from chapter: How Entry and Exit Lead to Zero Profits in the Long Run a) Suppose the price of corn is initially priced at $5/bushel and soybeans are priced at $6/bushel. What do you produce in each area? What is your operating profit on each plot and what are your implicit costs? b) Suppose a large increase in demand for tofu increases the price of soybeans to $8/bushel, while the price of corn remains at $5/bushel. What do you choose to produce on each plot? What is your operating profit on each plot and what are your implicit costs? c) Given that these prices are available to all farmers, what would you expect to happen in the long-run to the price of soybeans and the price of corn? Explain why this happens. SHOW WORK STEP BY STEP
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