Contracts and minimum-maximum price contracts

Reference no: EM133553822

Question 1) "Both futures contracts and HTA contracts allow us to lock in the futures price and leave the basis open. Therefore, when we are considering which of these two contracts we want to use to sell our commodities, it doesn't matter which one we end up choosing."

Question 2) "When we are selling commodities, minimum price contracts and minimum-maximum price contracts guarantee a minimum price that we will receive. Therefore, overall using either one of these two contracts will always guarantee that we will make a profit. In particular, when futures price goes down and basis widens during the hedge, these two contracts will always give us a higher realized price compared to other contracts that we discussed (foward, HTA, basis, and futures)."

3) In Module 1 we discussed rolling hedges with futures contracts. The same idea applies to cash contracts. We can roll forward a hedge with a HTA contract, for example. So let's go back to the general idea of rolling hedges.

Indicate whether you agree or disagree with the statement below and justify your opinion in detail (i.e. explain all the reasons why you agree or disagree with the statement).

"When I think about rolling a hedge forward, I look at the spread between futures prices (for the current delivery month and the new delivery month), my cost of carry, and also historical basis in my local cash market (for the current delivery month and the new delivery month). If the spread between futures prices is less than the cost of carry, I don't even consider the possibility of rolling the hedge forward because I am sure I won't make more money by doing so."

Reference no: EM133553822

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