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ch11 sol - CHAPTER 11 DERIVATIVES MARKETS ANSWERS TO...

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1 CHAPTER 11 DERIVATIVES MARKETS ANSWERS TO END-OF-CHAPTER QUESTIONS 11. Assume that in March a farmer and a baker enter into a forward contract on a thousand bushels of wheat at a price of $3.00 per bushel for delivery in September. In September the spot price of wheat is $2.50 per bushel. Who has profited from entering into the forward contract and who has lost? How much is the gain and how much is the loss? The farmer has locked in a price for his/her wheat at $3 when the spot price is $2.50. The farmer is ahead by $.50 x 1000 = $500, whereas the baker’ s hedge, locking in a source of wheat at $3, has produced a $500 loss. Still, by entering into the forward contract, the baker eliminated or significantly reduce the uncertainty regarding his/her profit margin through locking in a specific price for wheat. 12. Assume the initial margin on a Eurodollar futures contract is $750 and the maintenance margin is $500. If the contract price declines by 25 basis points, by how much do the long and short positions margin balances change?
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