1. A major bread maker is planning to purchase wheat in the near future. Identify and explain the appropriate hedging strategy.
2. Explain how the implied repo rate on a spread transaction differs from that on a nearby futures contract.
3. Suppose you are a dealer in sugar. It is September 26, and you hold 112,000 pounds of sugar worth $0.0479 per pound. The price of a futures contract expiring in January is $0.0550 per pound. Each contract is for 112,000 pounds.
a. Determine the original basis. Then calculate the profit from a hedge if it is held to expiration and the basis converges to zero. Show how the profit is explained by movements in the basis alone.
b. Rework this problem, but assume the hedge is closed on December 10, when the spot price is $0.0574 and the January futures price is $0.0590.