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Tutorial 1_Q

The document discusses the differences between long and short futures positions and explores how a cattle farmer can hedge against price fluctuations using futures contracts. It also examines a mining company's potential hedging strategies for gold futures and compares the profits of two traders engaging in currency futures and forward contracts amidst fluctuating exchange rates. The document highlights the pros and cons of hedging for the farmer and the impact of daily settlement on trader profits.

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imranirfan.st
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2 views

Tutorial 1_Q

The document discusses the differences between long and short futures positions and explores how a cattle farmer can hedge against price fluctuations using futures contracts. It also examines a mining company's potential hedging strategies for gold futures and compares the profits of two traders engaging in currency futures and forward contracts amidst fluctuating exchange rates. The document highlights the pros and cons of hedging for the farmer and the impact of daily settlement on trader profits.

Uploaded by

imranirfan.st
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Tutorial 1

1. What is the difference between a long futures position and a short futures position?

2. A cattle farmer expected to have 120,000 pounds of live cattle to sell in three months.
The live-cattle futures contract on the Chicago Merchantile Exchange is for the delivery
of 40,000 pounds of cattle. How can the farmer use the contract for hedging? From the
farmer’s viewpoint, what are the pros and cons of hedging?

3. It is July 203. A mining company has just discovered a small deposit of gold. It will
take six months to construct the mine. The gold will then be extracted on a more or less
continuous basis for one year. Futures contracts on gold are available on the New York
Mercantile Exchange. There are delivery months every two months from August 2013
to December 2014. Each contract is for the delivery of 100 ounces. Discuss how the
mining company might use futures markets for hedging.

4. Trader A enters into futures contracts to buy 1 million euros for 1.4 million dollars in
three months. Trader B enters in a forward contract to do the same thing. The exchange
rate (dollars per euro) declines sharply during the first two months and then increases
for the third month to close at 1.4300. ignoring daily settlement, what is the total profit
of each trader? When the impact of daily settlement s taken into account, which trader
has done better?

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