A commodity trader Mr Joseph observed
the following corn futures prices on 20.04.2012 as below. The spot price of
corn as on 20.04.2012 was 610 (cents per bushel). Mr George, another commodity
trader is willing to buy corn, in future as on 20.04.2013. Mr George entered
into a long futures contract, looking into the increasing prices of corn. Mr
Joseph is holding the commodity. The risk free rate of return as on 20.04.2012
was 3.75% (in US). The storage cost to be incurred by holder of the asset (by
the end of the year) is 3%. Mr Joseph (short futures) and Mr George entered
into a futures contract through exchange. If Mr George agreed into the long futures
contract, at a futures price, after considering the theoretical or mathematical
expected futures price as on 20.04.2012, explain the pay-off or positions of
the traders as on 20.04.2013.
|
Futures quotes
|
Prices (cents per bushel)
|
|
May 2012
|
610
|
|
July 2012
|
610
|
|
Sep 2012
|
620
|
|
Dec 2012
|
630
|
|
Mar 2013
|
640
|
The corn futures as on 19.04.2013
obtained from CME group are as below:
|
Futures quotes
|
Prices (cents per bushel)
|
|
April 2013
|
650
|
|
May 2013
|
644.6
|
|
Sep 2013
|
565.0
|
|
Dec 2013
|
539.60
|
|
Mar 2014
|
550.00
|
This is a hypothetical case study created on the basis of CME prices on
corn futures. The readers of the blog are requested to understand:
Futures
price curve as on 20.04.2012
Futures
price curve as on 19.04.2013
How
will Mr George close his position?
Who
will gain or lose in this futures transaction?
Can
we correlate the case to any case studies of organizations?
As on date of closure of contract (19.04.2013), how is the
market (contango or normal backwardation)
This is one of the most important case studies based on practical application, for those who are
involved in risk management.
ALL THE BEST
Suggestions and comments are always welcome.
Surya
cfa.surya@gmail.com
No comments:
Post a Comment
Note: only a member of this blog may post a comment.