Question

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
Next > < Previous

Related Solutions

Juan acquires a new 5-year class asset on March 14, 2020, for $200,000. This is the...
Juan acquires a new 5-year class asset on March 14, 2020, for $200,000. This is the only asset Juan acquired during the year. He does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation. On July 15, 2021, Juan sells the asset. Click here to access depreciation table to use for this problem. a. Determine Juan's cost recovery for 2020. $ b. Determine Juan's cost recovery for 2021. $ On August 2, 2020,...
Suppose that you hold a piece of land in the City of London that you may...
Suppose that you hold a piece of land in the City of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that, if the British economy booms in the future, the land will be worth £10,000 and one British pound will be worth $1.36. If the British economy slows down, on the other hand, the land will be worth less, i.e., £9,000, but the...
Suppose that you hold a piece of land in the City of London that you may...
Suppose that you hold a piece of land in the City of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that, if the British economy booms in the future, the land will be worth £2,000 and one British pound will be worth $1.40. If the British economy slows down, on the other hand, the land will be worth less, i.e., £1,500, but the...
Suppose that you hold a piece of land in the City of London that you may...
Suppose that you hold a piece of land in the City of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that, if the British economy booms in the future, the land will be worth £2,000 and one British pound will be worth $1.40. If the British economy slows down, on the other hand, the land will be worth less, i.e., £1,500, but the...
On March 31st, 2020, Adtech Inc. issued $200,000, 9%, 10-year bonds. The bonds pay interest semi-annually,...
On March 31st, 2020, Adtech Inc. issued $200,000, 9%, 10-year bonds. The bonds pay interest semi-annually, on September 30 and March 31. The first interest payment is on September 30, 2020. The bonds are issued at a price of 114 1/4 (i.e., $228,500). The issuance price implies an effective interest rate of 7%. Bond issue costs are $10,000, which are amortized using the straight-line method. Adtech's fiscal year-end is on December 31. 1. Prepare all necessary journal entries in relation...
On March 31, 2020, Adtech Inc. issued $200,000, 9%,10-year bonds. The bonds pay interest semi-annually, on...
On March 31, 2020, Adtech Inc. issued $200,000, 9%,10-year bonds. The bonds pay interest semi-annually, on September 30 and March 31. The first interest payment is on September 30, 2020. The bonds are issued at a price of 1141/4 (i.e., $228,500). The issuance price implies an effective interest rate of 7%. Bond issue costs are $10,000, which are amortized using the straight-line method. Adtech’s fiscal year-end is on December 31. 1.Prepare all necessary journal entries in relation to these bonds...
Suppose the first population is all Zoom meetings held in March 2020, the second population is...
Suppose the first population is all Zoom meetings held in March 2020, the second population is all face-to-face meetings held in March 2020, and the parameter of interest is μ1 – μ2 = the difference in the mean number of people attending all Zoom meetings and the mean number of people attending all face-to-face meetings. For both Zoom meetings and face-to-face meetings the distributions are skewed heavily to the right due to some meetings that have many people in attendance....
The balance date for this company is 31st March 2020. You are to record the effect...
The balance date for this company is 31st March 2020. You are to record the effect of each transaction on the extended accounting equation using the table on the next page (page 5). Include all balance day adjustments where applicable. The first example illustrates how you would record the answers on the table. Purchased inventory for $55,000. Paid half upon the receipt of the inventory and the remainder on credit. Depreciate the equipment at balance date. Cost of equipment is...
You are a Health & safety Specialist. The date is March 12th 2020 and the world...
You are a Health & safety Specialist. The date is March 12th 2020 and the world Health Organization has just announced that COVID-19 is a world pandemic the day before. The CEO of the company you work at has called you into her office and requested that you come up with a plan to deal with this issue. She has been hearing about staff complaining that the company is not doing enough to protect them. She asks you to come...
Suppose the first population is all face-to-face meetings held in March 2020, the second population is...
Suppose the first population is all face-to-face meetings held in March 2020, the second population is all Zoom meetings held in March 2020, and the parameter of interest is μ1 – μ2  = the difference in the mean length of all face-to-face meetings and the mean length of all Zoom meetings. The meeting lengths are measured in minutes. For both face-to-face meetings and Zoom meetings the distributions of meeting times are skewed heavily to the right due to some meetings that...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT