Baran

 

AIM 14: Evaluate the differences between a strip hedge and a stack hedge and analyze how these differences impact risk management.

1、How could an oil refiner hedge the risk of an agreement to supply 50,000 barrels of oil each month for a year at a fixed price? The oil refiner could enter a:

      I. long futures contract position for every month for 50,000 barrels.

     II. short futures contract position for every month for 50,000 barrels.

    III. long near-term futures contract for 600,000 barrels.

    IV. short near-term futures contract for 50,000 barrels.

A) I only.

B) I and III only.

C) II only.

D) II and IV only.

Baran

 

The correct answer is D

 

When a convenience yield is associated with a commodity, the futures price on that commodity becomes a range, rather than a single value.  The range is expressed in the following formula:


Using this formula, we can calculate the range of futures prices acceptable for the soybean and soybean oil futures contracts as follows::

 

For a crush spread, the investor goes long (short) a soybean futures contract and then takes a short (long) position in a soybean meal futures contract.fficeffice" />

 

Baran

 

The correct answer is C

 

Natural gas is an example of a commodity with constant production but seasonal demand.

Baran

 

4、Which of the following commodities is very difficult to store and transport?

A) Gold.

B) Corn.

C) Natural gas.

D) Oil.

Baran

 

The correct answer is C

 

Natural gas is expensive to store, and demand in the United States peaks during high periods of use in the winter months. In addition, the price of natural gas is different for various regions due to high international transportation costs.

Baran

 

AIM 12: Define and compute a commodity spread.

 

1、A hedge fund specializing in commodity related derivatives is considering a crush spread position using soybean and soybean oil futures contracts. Using the information in the table below, determine which of the following statements is correct.

< >>	Soybeans	Soybean Oil
Spot Price	$5.83/bushel	$0.27/pound
Storage Cost*	0.63/bushel	0.03/pound
Convenience Yield*	6%	6%
Interest rate*	11%	11%
Time to expiration	3 months	6 months

*Continuously compounded annual rates

A) The hedge fund should establish a long position in the soybean futures contract for no more than $6.91 and a short position in the soybean oil contract for no less than $0.29.

B) The hedge fund should establish a short position in the soybean futures contract for no less than $7.01 and a long position in the soybean oil contract for no less than $0.28.

C) The hedge fund should establish a long position in the soybean futures contract for no more than $7.01 and a long position in the soybean oil contract for no more than $0.29.

D) The hedge fund should establish a long position in the soybean futures contract for no more than $7.01 and a short position in the soybean oil contract for no less than $0.28.

Baran

 

The correct answer is D

 

Gold can be loaned out to financial intermediaries and other investors willing to pay the lease rate (the price for borrowing the gold) to the lender. Thus, holding physical gold requires the investor to forgo earning the lease rate while also incurring storage costs. Therefore, the ideal gold exposure strategy is generally to hold synthetic gold.

Baran

 

2、Which of the following commodities is an example of seasonal production and constant demand?

A) Corn.

B) Gold.

C) Natural gas.

D) Oil.

Baran

 

The correct answer is A

 

Corn is an example of a commodity with seasonal production and a constant demand. Corn is produced in the fall of every year, but it is consumed throughout the year.

Baran

 

3、Which of the following commodities is an example of constant production and seasonal demand?

A) Gold.

B) Corn.

C) Natural gas.

D) Oil.