Reference no: EM131401805

Now is January 2016. Sophie will buy 50,000 pounds of lean hog in March 2016.To hedge the hog price, she buys a March 2016 maturity lean hog contract at thefuture price of $1.20 per pound. Suppose that when the contract matures in March2016, the market price of hog turns out to be $1 per pound. This future contractcalls for purchase of 50,000 pounds.

a) Calculate Sophie's payoff from purchasing 50,000 pounds of hogs in the spotmarket in March 2016 (note: a payment for purchase is a negative payoff);

b) Calculate Sophie's payoff from the future market in March 2016;

c) Calculate Sophie's total payoff from both the spot and future markets in March2016;

d) If the market price of hog goes up to $1.50 per pound in March 2016, what'sSophie's total payoff?

e) Draw the future contract payoff graph for Sophie.