Suppose a farmer is expecting that her crop of oranges will be ready for harvest and sale as 150,000150,000 pounds of orange juice in 33 months time. Suppose each orange juice futures contract is for 15,00015,000 pounds of orange juice, and the current futures price is F_0 = 118.65F 0 =118.65 cents-per-pound. Assuming that the farmer has enough cash liquidity to fund any margin calls, what is the risk-free price that she can guarantee herself.
Answers
Suppose a farmer is expecting that her crop of oranges will be ready for harvest and sale as 150,000150,000 pounds of orange juice in 33 months time. Suppose each orange juice futures contract is for 15,00015,000 pounds of orange juice, and the current futures price is F_0 = 118.65F 0 =118.65 cents-per-pound. Assuming that the farmer has enough cash liquidity to fund any margin calls, what is the risk-free price that she can guarantee herself.
Step-by-step explanation:
The kind of agreement above is called a futures contract.
It can be defined as a legal agreement to buy or sell a particular asset, or security at a predetermined price at a specific time at a future date.
Current Futures Price
= 118.65 cents/pound
Each orange juice futures contract
= 15,000 pounds
Contracts required
= 150,000 / 15,000 = 10
Futures Price = Spot price *(1+Rf (x/365)) – d.
Notional value = Contract size x Spot price
10*118.65 = 1186.5