Equations

Question 1

It is June and a gasoline distributor is worried that price of gasoline will be rising in the next few months and decides to hedge with September futures when the cash price is 2.75 and the September futures 2.80. In September the distributor closes the hedge when the cash price is $3.20 and the September futures are $3.30.

What was the distributors net price paid for gasoline?

(A) $3.70
(B) $3.30
(C) $2.80
(D) $2.70

Answer 1

(D) $2.70

EXPLANATION
Step 1.) Cash - Cash = 0.45
Step 2.) Future - Future = 0.50
Step 3.) Higher Cash Price - Future Result
(3.20 - 0.50 = 2.70)

Question 2

On August 10, April plywood futures are at $109 per 1,000 square feet (MSF) and cash plywood at a particular location in the South is selling at $115 MSF. On August 10th, a plywood dealer places an order for one boxcar to be shipped in March at the current cash price on the delivery day. Both dealer and miller hedge this forward on the Chicago Board of Trade.On March 15, when the order is shipped April futures are $125 per MSF and the cash price is $121. What is the result of the dealer’s hedge per MSF?

(A) +$6 per MSF
(B) -$6 per MSF
(C) +$10 per MSF
(D) -$10 per MSF

Answer 2

(C) +$10 per MSF

EXPLANATION
Step 1.) Cash - Cash = 6
Step 2.) Future - Future = 16
Step 3.) Future Result - Cash Result = 10
(16-6=10)

Question 3

A U.S. importer of German cars has benefited by the strength of the dollar relative to the Deutsche Mark. He feels the dollar will weaken as interest rates decline. He anticipates payables in Deutsche Marks equivalent to $2 million in the next 3 months. The IMM Deutsche Mark futures contracts cover 125,000 Deutsche Marks. The importer hedges with 30 contracts with the Deutsche Mark at .5280 on the foreign exchange market, and Deutsche Mark futures at .5310. Three months later the hedge is lifted with the Deutsche Mark at .5335 on the foreign exchange market and the Deutsche Mark future at .5368. If the importer had not hedged, he could have suffered an exchange loss of?

(A) 20,375
(B) 14,250
(C) 15,750
(D) 20,625

Answer 3

(D) 20,625

EXPLANATION
If the Importer had not hedged, you would just calculate the cash side of the T formation. Cash Only.5280 -.5335 +.0055increase in exchange ratex 125,000= 687.50x 30= $20,625more to import cars.

Question 4

Margins for corn futures on the CBT are 30 cents per bushel and the commission on the transaction is $40 per contract. A trader takes a long position of 2 contracts of corn at 4.35. What is his percentage of profit after his commissions on his margin deposit if his position is covered at 4.42? (Contract Value 5,000 bushels)

[A] 16%
[B] 21%
[C] 44%
[D] 62%

Answer 4

[B] 21%

Question 5

A coffee buyer wants to hedge with coffee futures. He buys 5 coffee futures contracts at 202.20 (37,500 lbs per contract) He later decides to offset his contracts at 206.20 cents/lb. His profit or loss on this hedge is…

[A] Gain $1,500.00
[B] Loss $1,500.00
[C] Gain $7,500.00
[D] Loss $7,500.00

Answer 5

[C] Gain $7,500.00