Financial Derivatives and Risk Management Assignment

Financial Derivatives and Risk Management Assignment in $25 Only

ADM is a food company. They operate a warehouse where food growers can sell their food crops in a spot market. ADM has a warehouse in northwest Ohio located next to a railroad track. They buy truck loads of grain and warehouse the grain until they get enough to load a train. Once the grain is loaded on to the train it is sent to Cincinnati, from there it is loaded on to river barges and shipped to New Orleans. You have been hired by ADM as a risk manager. Your responsibility is to manage ADM’s risk exposure. In this example you need to construct a hedge to eliminate price risk. The Panamax bulk carrier holds 50,000 tons. That is equivalent to 100 million pounds. Soybeans weigh 60 lbs per bushel. Assume that ADM buys the soybeans in Cincinnati, OH during the month of November, 2012 (all at once on the 15 th). The river barges will be loaded in Cincinnati, OH in November of 2012 and begin transport down the Ohio River to the Mississippi River to New Orleans. The Panamax will be loaded during the week of December, 2012 . Once the soybeans are completely loaded at the end of that 1 st week in December, ownership transfers to China. Assume that soybeans are $15/bushel in November and $16/bushel in December. Further assume that spot price is equal to futures, basis = 0. Soybean futures contracts are traded on the Chicago Board of Trade ( www.cmegroup.com) where 1 contract equals 5,000 Bushels.
a. Construct a futures hedge for ADM to manage this risk. Be sure to correctly specify the number of contracts, dates, spot market price, futures market price. Be sure to show the profit or loss from the hedge.
b. What is the capital requirement to initiate the margin requirements for the contracts in question 31?
Based on the same assumptions in question 31, construct an options hedge for the same purpose