Reference no: EM133122544

Question

a) Please list 4 differences that exist between forward and futures contracts.

(b) In August 2021, a soy beans seller decided to hedge her entire anticipated 1,000 tonne soy beans production with January 2022 soy beans futures that were trading at a price of $390 per tonne.

In January 2022, the farmer produced 1,100 tonne of soy beans and sold them on the market for $330 per tonne. She then closed out her January soy beans futures contracts for $325 per tonne.

From this information and using a standard soy beans futures contract size of 100 tonne per contract, calculate the overall value of the soy beans production including the profit or loss from futures trading.

(c) On 13 January 2022, the BHP shares are trading at $49. The June 2022 BHP Call option with exercise price $50 has a premium of $5. The June 2022 BHP Put option with exercise price $50 has a premium of $4. Your expectation is that the share price will decrease by 15% by June 2022.

Given this information and the fact that the standard option contract size is 100 shares per contract, outline one option strategy using Call and one option strategy using Put that will profit from your expectation that the BHP share price will decrease. Compute the actual profit or loss (per contract) on the call option strategy and on the put option strategy separately, assuming that the share price will be equal to $45 at the expiration of the options.