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    Chapter 15 RBL Extra Tutorial Question (Part 1)

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    corporate finance and investment III practice material

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    Chapter 15 RBL Extra Tutorial Question (Part 1)

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    leopard
    1 views1 page
    corporate finance and investment III practice material

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    Chapter 15 RBL Extra Tutorial Question (part 1)

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    corporate finance and investment III practice material

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    1 views1 page

    Chapter 15 RBL Extra Tutorial Question (Part 1)

    Uploaded by

    leopard
    corporate finance and investment III practice material

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    DSA: Chapter 15 RBL Extra Tutorial Question (part 1)

    Question 1

    It is December 10 and a farmer in the US is considering taking a position in a CBOT


    Oat Futures contract. He needs to hedge an existing 1700 metric ton oat position in
    the spot market. The contract expires on July 10 and calls for the delivery of 85 metric
    tons (5000 bushels) of oats. Further, because this is a futures position, it requires the
    posting of a $1350 initial margin and a $1000 maintenance margin per contract. For
    simplicity, however, assume that the account is marked to market on a monthly basis.
    The following represent the futures prices (in $/bu.) that prevail on each date:

    December 10
    $3.70/bu
    (initiation)

    January 10 3.77

    February 10 3.80

    March 10 3.62

    April 10 (delivery) 3.58

    a) How many contracts will the farmer need to trade and what position should he
    take to hedge his spot position?
    b) Calculate the equity value of your margin account on each date, including any
    additional equity required to meet a margin call. Also, compute the gain or loss
    on his position if he maintains it until expiration.
    c) What is the rate of return of the position?

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