ADM is a food company. They operate a warehouse where food growers can sell their food crops in a spot market. ADM has a warehouse in northwest Ohio located next to a railroad track. They buy truck loads of grain and warehouse the grain until they get enough to load a train. Once the grain is loaded on to the train it is sent to Cincinnati, from there it is loaded on to river barges and shipped to New Orleans. You have been hired by ADM as a risk manager. Your responsibility is to manage ADM's risk exposure. In this example you need to construct a hedge to eliminate price risk. The Panamax bulk carrier holds 50,000 tons. That is equivalent to 100 million pounds. Soybeans weigh 60 lbs per bushel. Assume that ADM buys the soybeans in Cincinnati, OH during the month of November, 2012 (all at once on the 15 th). The river barges will be loaded in Cincinnati, OH in November of 2012 and begin transport down the Ohio River to the Mississippi River to New Orleans. The Panamax will be loaded during the week of December, 2012 . Once the soybeans are completely loaded at the end of that 1 st week in December, ownership transfers to China. Assume that soybeans are $15/bushel in November and $16/bushel in December. Further assume that spot price is equal to futures, basis = 0. Soybean futures contracts are traded on the Chicago Board of Trade ( www.cmegroup.com) where 1 contract equals 5,000 Bushels.
a. Construct a futures hedge for ADM to manage this risk. Be sure to correctly specify the number of contracts, dates, spot market price, futures market price. Be sure to show the profit or loss from the hedge.
b. What is the capital requirement to initiate the margin requirements for the contracts in question 31?
Based on the same assumptions in question 31, construct an options hedge for the same purpose.
Be sure to show the profit or loss from the hedge.
You are the risk manager of an energy producing company. Your firm explores for and extracts crude oil. Your firm regularly produces approximately 50,000 barrels of oil monthly. You watch the energy markets closely and determine in early November 2012 that the current market price of $87 per barrel maybe a temporary peak. Construct both a futures and options hedge to lock in this $87 bbl price for the next 6 months. Be certain to specify contracts, quantities, dates and all relevant and pertinent information for this hedge, including the actions required to complete the hedge at the end of the time horizon.
Discuss the advantages and disadvantages of the futures and options hedging strategies in the previous question (34). Be sure to discuss the important aspects of the two hedging strategies including, but not limited to, the capital requirements.