Econ 337 Spring 2015 Due 10am 100 points possible
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1 Econ 337 Spring 2015 Final Due 10am 100 points possible Fill in the blanks (2 points each) 1. Basis = price price 2. A bear thinks prices will. 3. A bull thinks prices will. 4. are willing to make or take physical delivery because they are producers or users of the commodity. 5. have no use for the physical commodity. 6. A futures contract is a legally binding contract to or delivery of the commodity. 7. The option buyer has upside and downside risk. 8. is defined as when nearby futures are priced at a discount to further out futures. True or False (2 points each) 9. T F A put option contains the right to buy a futures contract. 10. T F A call option contains the right to buy a futures contract. 11. T F Futures reflect global supply and demand, and basis reflects local supply and demand. 12. T F Short hedge expected price = Futures + basis + premium + commission. 13. T F If the carry more than covers the cost of ownership, then it s referred to as full carry. 14. T F Futures are a zero sum game as people lose as much money on futures as they gain on them. 15. T F Puts and calls are opposite positions in the same market. 16. T F The premium is the predetermined price for the trade of futures contracts in the option.
2 Short Answer (4 points each) 17. I put on a short hedge using Dec corn futures on Apr. 23. To do that did I buy or sell a futures contract? The futures price was $3.95 per bushel. If my expected basis is -$0.25 per bushel and the broker charges me a 2 cent per bushel commission, what is my expected price under the short hedge? 18. I purchased a Dec corn put option with a $3.90 strike price. The premium was 28 cents. If my expected basis is -$0.25 per bushel and my broker charges me a 1 cent per bushel commission, what is my floor price with this option? The Dec corn futures price was $3.95 when I purchased the option. What is the intrinsic value of the option? 19. For 2015, you have an expected corn yield of 200 bushels per acre on your farm, based on your previous corn yields. The spring time insurance price for corn is $4.15 per bushel. If you got 125 bushels per acre in 2015 and the harvest time price was $5.00 per bushel, what would be the insurance payment if you bought 80% revenue insurance (with the harvest price option)?
3 Long Answer (6 points each) 20. How much are the total storage and opportunity costs for soybeans that I have in storage given the following details? 50,000 bushels of corn stored for 4 months 3 cents per bushel for each month Harvest price of $3.50 and a short-term interest rate of 3% 21. Given the data below, compute a 14-day Relative Strength Index for Nov soybeans. Date Futures Price 4/1/ /2/ /6/ /7/ /8/ /9/ /10/ /13/ /14/ /15/ /16/ /17/ /20/ /21/ /22/
4 Margins (12 points) 22. I am a hedger that went short on November 2015 soybeans on Apr. 16, 2014 at $ per bushel. The initial margin requirement is $2,500. The maintenance margin is $2,000. Fill out my margin account for one futures contract. Date Futures Price Gain/Loss Margin Call Account Balance 4/16/2015 $ X X $2, /17/2015 $ /20/2015 $ /21/2015 $ /22/2015 $ Math and Graph (16 points each, please show your work) Assume historical expected basis of -$0.25 per bushel and a commission of $0.01 per bushel for both crops. Please graph the relevant cash price, option return, and net price lines. 23. A corn producer does a short hedge for March 2016 at a futures price of $4.05 per bushel. What is her floor price with the short hedge in place? If the Mar corn futures price falls to $3.25, what is her net price?
5 Return/Net Price $8.00 $7.00 $6.00 $5.00 $4.00 $ $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00 $10.00 Futures Price 24. A corn producer is using a window or fence strategy to protect against price risk. She buys a $3.50 put option on Dec corn. The premium for the put option is $0.10. At the same time, she sells a $5.00 call option on Dec corn. The premium for the call option is $0.07. Her broker charges her a commission of 1 cent per bushel for each transaction. At the time, the Dec corn futures price was $3.95. She expects a harvest time basis of -$0.25 per bushel. What is her floor price?
6 If the Dec corn futures rises to $5.25, what is her expected net price? If the Dec corn futures falls to $3.00, what is her expected net price? Return/Net Price $8.00 $7.00 $6.00 $5.00 $4.00 $ $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00 $10.00 Futures Price
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