4. Select some trading day, e.g., 6 March 2017, and assume you are a broker and one of your customers, the UK Company “All-for-Bread Bakery”, requires 1,000 tonnes of corn to be delivered at the approved silo on 5 November 2017. Use the relevant data from Euronext to answer the following questions:
a) Describe in full the corn futures contract that “All-for-Bread Bakery” will enter into and calculate how much this hedging strategy will cost to the company.
b) Describe the alternative hedging strategy that “All-for-Bread Bakery” has using options contracts on corn futures. What is the cost of the strategy with options? Construct two price scenarios to explain under what circumstances the Company should exercise its options.
app. 600 words [20 marks]
5. Suppose that in question 4 “All-for-Bread Bakery” selects the options strategy and chooses to exercise the options at maturity based on the appropriate scenario you made.
a) Since “All-for-Bread Bakery” is a UK company, you now need to construct two reasonable EUR/GBP exchange rate scenarios to calculate the currency gains or losses that the company will have under each EUR/GBP scenario. Use current and historical exchange rate data to construct the two scenarios: https://www.xe.com
b) In which of the two scenarios you constructed in (5a), “All-for-Bread Bakery” should hedge against exchange rate risk? What is the
appropriate derivatives contract that the Company should enter into in order to hedge its exposure?
app. 600 words [20 marks]
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