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sir under Features of futures contracts, the following was mentioned in my workbook, but i do not quite understand it- “NYBOT fixes the exchange rate for a set amount of currency for a specified time period.”
Isnt this a feature of forward market, albeit operated by bank instead of NYBOT.
Am a little bemused sir, would you mind helping me?
many thanks!
It is a feature of both futures and the forward market. With futures, if they are held to the closing date then the rate is fixed on that date.
The difference is that financial managers do not normally hold futures to the maturity date – they trade the futures so as to hedge the risk on the underlying transaction. That is not the case with the forward market.
i need help on this question
Question 1
(i) The following specifications for the available Soya beans based futures contractsCommodity Price Symbol Month/Expiry Contract Size Months Point Value Forecast Price Jun 21
US Soybeans (Links to an external site.)
1005 ZS (S) Nov 20 5,000 Bushels FHKNQUX 1 = $50 892
US Soybean Oil (Links to an external site.)
35 ZL (BO) Dec 20 60,000 Lbs. FHKNQUVZ 1 = $600 28
US Soybean Meal (Links to an external site.)
324 ZM (SM) Dec 20 100 Tonnes FHKNQUVZ 1 = $100 293NB: 1 bushel of soybeans = 60 pounds = 10.7 pounds of crude soy oil = 47.5 pounds of soybean meal = 39 pounds of soy flour = 20 pounds of soy protein concentrate = 11.8 pounds of isolated soy protein
Also: Assume that the tenure of the futures contract = 3 months
Using the data above assess the exposure to volatile commodity prices and design hedging strategies for the following entities.
(a) A Zambia Soybeans Farmer with an output of 2,000,000 tonnes whose harvest is expected in June 2020. [5 marks]
(b) An international stock feed processing company with 180,000,000 Tonnes of Soybean Meal based output per year. [5 marks]
(c) Outline the challenges faced in trying to achieve a perfect hedge in the above two cases.
[4 marks]
(d) Describe how a cross hedge could be achieved for each of the above. [4 marks](e) Given the above forecast prices, evaluate the most profitable of the three possible hedges for the farmer. [7 marks]
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