Answer-first summary for fast verification
Answer: \$602,000
A stack-and-roll hedge keeps the exposure hedged by rolling futures forward as the delivery month approaches. The company needs to hedge 100,000 bushels, so it initially buys: \[ 100{,}000 / 5{,}000 = 20 \text{ contracts} \] Per bushel gains from the futures positions are: - Jan-15 to Apr-15: \(6.00 - 5.85 = 0.15\) - Apr-15 to Aug-15: \(6.30 - 6.10 = 0.20\) - Aug-15 to Feb-15: \(6.50 - 6.40 = 0.10\) Total futures gain per bushel: \[ 0.15 + 0.20 + 0.10 = 0.45 \] At purchase, the spot price is \$6.47, so the net cost per bushel is: \[ 6.47 - 0.45 = 6.02 \] Thus the total net cost is: \[ 100{,}000 \times 6.02 = \$602{,}000 \] So the correct answer is **\$602,000**.
Author: Manit Arora
Ultimate access to all questions.
Q-21.14.3. Stack-and-roll strategy
On January 15th of Year 1, a company decided to hedge the planned purchase of 100,000 bushels of corn thirteen months later (on February 15 of Year 2). Below are displayed the per-bushel futures prices of three selected contracts on four different dates.
| Bushels | 100,000 |
|---|---|
| Per Contract (Size) | 5,000 |
| Year 1 | Year 2 | |
|---|---|---|
| Jan-15 | Apr-15 | |
| May, Year 1 Futures Price | `$5.85` | `$6.00` |
| Sep, Year 1 Futures Price | `$6.10` | |
| March, Year 2 Futures Price |
Assume the following: at the time of ultimate purchase (February 15 of Year 2), the spot price is `6.47` per bushel when the final contract's basis is \`6.47 - \6.50` = -\`0.03`. If the company employs a stack-and-roll strategy, what is the company's net (i.e., after hedging) cost to acquire the corn? [inspired by GARP's EOC Question 8.20]
A
`$45`,000
B
`$602`,000
C
`$647`,000
D
`$650`,000
No comments yet.