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3 views

Seminar-11_Exercises_Derivatives1 (1)

Uploaded by

comicabi1990
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Corporate Finance and Investments

Futures and Forwards

Exercise 1: Forward valuation


The price of corn today is 10 USD per bushel. A corn producing farmer would like to hedge
her exposure to corn prices via the forward market. In 0.5 years he will harvest 1000 bushels.
Assume no carrying costs and perfect markets. The yearly risk-free return is 5%
1) What forward position should the farmer take?
2) What is the fair forward price today?
3) How much money will the farmer pay to enter this forward contract?
4) How much money will change hands as a result of contract in 1/2 year
5) In 0.5 the spot price of corn is 15 USD. How much is the profit/loss of the farmer (in
0.5 year) as a result of signing this contract? Will she be required to buy/sell at the
expiration

Exercise 2: Forward Valuation


A hog farmer needs wheat to feed the livestock in 1 year. He will need 100 bushels. He wants
to hedge his exposure to wheat prices. He observes that the fair forward price today is 7 USD
per bushel, and he goes to a bank to sign a forward contract. The yearly risk-free return is 10%.
Markets are perfect and there are no carrying costs.
1) What forward position would the hog farmer take?
2) How much money will the farmer pay for the forward contract?
3) How much money changes hands in 1 year between the farmer and the bank?
4) What is the farmer’s profit/loss as a result of signing this contract in 1 year if the spot
price in one year is 5/bushel?

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