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Suppose today is May 1, 2019, and your firm produces breakfast cereal and needs 400,000 bushels...

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Finance

Suppose today is May 1, 2019, and your firm produces breakfastcereal and needs 400,000 bushels of corn in July 2019 for anupcoming promotion. You would like to lock in your costs todaybecause you are concerned that corn prices might rise between nowand July. Each contract is for 5,000 bushels; the settle price forJuly 2019 is $5.18 per bushel.

Suppose corn prices are $5.14 per bushel in July 2019. What willyour cumulative mark to market be? (Do not round intermediatecalculations. Enter your answer as a positive value if a profit oras a negative number if a loss. Round to the nearest whole number,i.e. dollar, e.g., 32.).

Cumulative MTM = $_______

Answer & Explanation Solved by verified expert
4.4 Ratings (896 Votes)

Number of contract = 400,000 / 5,000

                                = 80

Number of contract is 80.

Total cost effectively locked = $5.18 × 400,000

                                              = $2072,000

Total cost effectively locked today is $2072,000.

Cumulative mark to market = ($5.14 - $5.18) × 400,000

                                             = -$0.04 × 400,000

                                             = - $16,000

Cumulative mark to market - $16,000. Since Cumulative mark to market is negative value so investor incur loss in futures contract.
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Suppose today is May 1, 2019, and your firm produces breakfastcereal and needs 400,000 bushels of corn in July 2019 for anupcoming promotion. You would like to lock in your costs todaybecause you are concerned that corn prices might rise between nowand July. Each contract is for 5,000 bushels; the settle price forJuly 2019 is $5.18 per bushel.Suppose corn prices are $5.14 per bushel in July 2019. What willyour cumulative mark to market be? (Do not round intermediatecalculations. Enter your answer as a positive value if a profit oras a negative number if a loss. Round to the nearest whole number,i.e. dollar, e.g., 32.).Cumulative MTM = $_______

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