Futures

swarnendupathak
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Futures

Postby swarnendupathak » Tue Oct 30, 2012 1:13 pm

The spot price of corn in April 10th is 207/bushels. The future price of the september contract is 241.5/bushels. If hedger are net short , which of the following statement is most acurate concerning the expected spot price of corn in September:
(a) E(So) of the corn is higher than 207
(b) E(So) of the corn is Lower than 207
(c) E(So) of the corn is higher than 241.50
(b) E(So) of the corn is Lower than 241.50

Please help in the concept...

Swarnendu

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vandana.jain
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Re: Futures

Postby vandana.jain » Wed Oct 31, 2012 1:51 pm

is the ans is d

swarnendupathak
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Re: Futures

Postby swarnendupathak » Wed Oct 31, 2012 2:13 pm

The correct ans is option (c) with no explanation given in the net. Please let me know the specific explanation of your answer, as i am not able to get it.

Swarnendu

content.pristine
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Re: Futures

Postby content.pristine » Wed Oct 31, 2012 2:37 pm

The answer is C.

Hedgers are those who are protecting the underlying by entering into Futures contracts. Here, they are saying hedgers are short. Basically, hedgers want to sell things in the future. Since everyone is selling futures, that must mean that the futures price is lower than what it should actually be.

In that case, the expected price of the spot (correctly priced), at contract expiry should be higher than the futures price (since the futures price has been striked down by hedgers).

Hope this helps! 8-)

vandana.jain
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Re: Futures

Postby vandana.jain » Wed Oct 31, 2012 4:18 pm

but when we see actual future price is greater then SOert(calculated price) we should we short. by that logic future price should be higher?

content.pristine
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Re: Futures

Postby content.pristine » Wed Oct 31, 2012 5:38 pm

The hedgers are going short.
That means the futures price will be lowered by the force of the hedgers.. Basically, they are willing to go short in the futures at a lower price just so they can "hedge" their position.
If there are 100 Million people going short in the futures
In comparison, the correctly valued Expected Spot will be higher.

I hope this clarifies things.
8-)

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Re: Futures

Postby swarnendupathak » Thu Nov 01, 2012 9:23 am

Thanks pristine...

Swarnendu


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