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In: Finance

Suppose that you are a dealer in sugar. On 26th March 2020 you hold 200,000 pounds...

Suppose that you are a dealer in sugar. On 26th March 2020 you hold 200,000 pounds of sugar in inventory that is worth $0.0379 per pound. The current price of a futures contract expiring 3 months later in June is $0.0450 per pound. Each futures contract is written on 100,000 pounds of sugar. You have decided to sell two June 2020 futures contract to hedge your planned sale of sugar later. Assume a zero interest rate so that you can ignore the cost of any initial margin or variation margins. The futures contract is cash settled.

Required:

  1. Calculate the original basis. Also calculate your net proceeds (from both the sale of sugar and the cash settlement of the futures contract if settlement of the futures contract takes place on the mandatory close out date). Assume the “type” of sugar and the sugar quality that underlies the futures contract exactly matches the physical sugar you hold as part of your inventory. Original Basis is: ? Net proceeds from sugar sale and settlement of any gain or loss on the two futures contract at maturity date or the mandatory close out date of the futures contract is: ?
  2. Now assume that the sugar is sold and the hedge is closed on 10th April 2020, when the spot price is $0.0474 and the June 2020 futures price is $0.0490. Calculate the net proceeds from both the sale of sugar and the cash settlement of the two futures contracts on 10th April 2020.

Solutions

Expert Solution

Part a)

Please refer to the calculations in screenshots below:

Net proceeds = $9000

Part b)

Net proceeds = $8,680

jeff jeffy answered 1 year ago
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