Hedging

Question 1

Effective Cost Equation

Answer 1

= Cash Later - Profit on Futures
OR
= Cash Now - Basis

Question 2

How many contracts do u use to hedge a postion?

For example: How many contracts do you need to hedge 30,000 bushels of corn if the contract size is 5,000 bushels?

Answer 2

Take number of units want to hedge divided by contract size. So 30,000/5,000 = 6 contracts

But if units aren’t perfect. ALWAYS round down

Question 3

T or F - The CFTC and the exchanges consider a pork producer who buys corn futures to be a bona fide hedger.

Answer 3

True - A hog farmer (pork producer) uses corn as feed for hogs. The farmer is a “user” of corn and faces price risk. So he can hedge

Question 4

The sale of soybean futures and the purchase of both soybean oil futures and soybean meal futures is referred to as

Answer 4

a reverse crush spread.

Question 4

what is a crush spread

Answer 4

Buying soybean futures and selling both soybean oil futures and soybean meal

Question 4

What is a selling Hedge and what is a buying hedge?

Answer 4

A selling hedge involves the sale of futures. Futures are sold by hedgers who are long the basis (long the cash commodity). An individual who is long cash is concerned about a price decline so they sell futures to hedge

A buying hedge is the purchase of futures, and is made when the hedger is short the basis (short the cash commodity) and worried prices will rise

Question 4

Whats the definition of a Bona fide hedger?

Answer 4

a producer or user of the cash commodity who buys or sells futures in an amount that is equal and opposite to his cash position.

To be a bona fide hedger u must have positions in the cash

Question 5

What kind of futures can you buy to hedge against the potential rise in shipping costs?

Answer 5

Freight futures

Question 6

Are hedgers exempt from position reporting levels?

Answer 6

No - Hedgers must report daily positions once the reporting level is reached. However, Hedgers are exempt from speculation position limits

Question 7

A businessman has agreed to deliver the cash commodity in three months at the price in effect today. In order to hedge effectively, he would:

Answer 7

Buy Futures

The businessman has agreed to deliver the cash commodity in the future. He does not own the cash commodity and wishes to protect himself against a price rise. He would therefore buy futures.

Question 8

Can a speculator get an exemption from the CFTC to exceed established trading and position limits?

Answer 8

NO - there is no exemption for speculators to exceed limits