★Insurance is often an effective way to reduce risk when the insurance company can spread its risk over many different policies.
★Forward contracts are marked to market. FALSE★Unlike options, the purchase of a futures contract is a binding obligation to purchase at a fixed price at contract maturity.
★How might a firm such as General Mills protect itself against fluctuations in raw material prices for breakfast cereals? Buy
★A commodity producer who is worried about future prices can best hedge by: selling a futures contract.★The purpose of a margin account for a futures contract is to: provide a cushion for the exchange against defaults on the contract.★The process of marking a futures contract to market means that: profits or losses are settled daily.★A futures contract calls for delivery of 60,000 pounds of soybean oil. What happens to the seller of a soybean oil futures contract at 41 cents per pound if the futures price closes the next day at 42 cents per pound?
The contract is marked to market with a $600 loss.
A futures contract seller is obligated to deliver 5,000 bushels of soybeans for $12.00 per bushel at expiration. If soybean futures close at $12.10 the next day, the seller: has a loss of $500 thus far on the contract.
★Hershey's Chocolate is concerned about cocoa prices, which are currently $3,000 a ton. Analysts project that the cost of cocoa purchases could vary from $2,900 to $3,100 a ton. A September call option can be purchased with a $2,950 exercise price for $145. What is Hershey's worst-case scenario if it purchases these options? Cocoa prices will fall below $2,950 and
★A gasoline distributor buys a gasoline futures contract to receive 42,000 gallons of gasoline at $2.94 per gallon. How is the account marked to market if gasoline futures close the next day at $2.97? A gain of $1,260 is posted to the account.
★Which one of the following futures contract holders is speculating? A cattle rancher who buys live cattle futures★A clothes producer hedges its future cotton purchases by buying cotton futures. The futures contract provides the producer with 50,000 pounds of cotton at a price of $0.80 per pound. By contract expiration the producer finds that cotton prices have declined to $0.73 per pound. As a result of the futures contracts, the producer will: lose $3,500 per contract in the futures