Question

Suppose a farmer is expecting that her crop of oranges will be ready for harvest and sale as 150,000 pounds of orange juice in 3 months time. Suppose each orange juice futures contract is for 15,000 pounds of orange juice, and the current futures price is F_0 = 118.65 cents-per-pound. Assuming that the farmer has enough cash liquidity to fund any margin calls, what is the risk-free price that she can guarantee herself. Please submit your answer in cents-per-pound rounded to two decimal places. So for example, if your answer is 123.456123.456, then you should submit an answer of 123.47123.47.

Answer 1

121.30

Step-by-step explanation:

The future price guarantees the holder of the contract to trade a commodity at a predetermined price at a later date. The farmer has orange crops ready for sale amounting $150,000. The number of contracts required is 150,000 / 15,000 = 10 contracts.

The spot price is 118.65 cents per pound. The risk free price is the value at which farmer has agreed to sell its crops. The risk free future price will be (1 + spot price)^-time * number of contracts / time

= (1 + 118.65)^-33 * 10 / 33

= 121.30