Mini Project On Derivatives Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

INTRODUCTION

There are basically two types of traders, the first one is hedgers and the second one is speculators. To manage the price risk in the futures market, hedgers use the futures contracts. Futures market is basically an exchange to buy and sell the futures contracts. Some of the common names include: the Chicago Board of trade, the New York Mercantile Exchange, the Kansas City Board of trade and etc. A futures contract regarding a specific contract such as Soybeans is a type of derivative instrument to buy or sell Soybeans at a future date at a fixed future price. Normally the contract will be completed with the actual delivery of the underlying commodity. It is also the case that most of the contracts are liquidated before the contract delivery date. The participants in the case of Soybeans in the futures market would be either the producers of the Soybeans or the consumers of the Soybeans. Most of these participants would be normally hedgers who would want to increase the value of their assets. These participants are interested in the price fluctuations and want to minimize the risks of losses that could be incurred due to price changes.

FUTURES CONTRACT SPECIFICATIONS

To explain the specifications of the futures contract for the commodity that we have chosen that is Soybeans, let us consider an example:

We assume that there is a farmer who is expecting in the month of June that he is going to harvest at least 10,000 bushels of Soybeans during the month of September. At this time the current cash price for the new crop soy beans is for example $ 7 and the futures price for the November’s future contract is $ 7.25. In this case, the month of delivery would be November and this would be marked as the month in which there will be harvesting of the new-crop soybeans.

FUTURES PRICE

The farmer in this case will sell two 5,000 bushel Soybean futures contract to short hedges his crop. He would be selling both of these futures contract at a price of $ 7.25. Normally, the farmers do not want to hedge all of their production because the production is expected. The right number of bushels that will be produced by the farmer is unknown till the time of the harvest. If we talk about our example, then in this scenario the farmer is expecting and is willing to produce 10,000 soybean bushels or even more. When the month of September will begin the futures as well as the cash prices of the commodity will have been fallen by that time. Now, the farmer will sell the cash beans at a price of $ 6.72 to one of the local elevator. After this he will lift his position by purchasing the Soybean futures for the month of November at a set price of $ 6.95. By doing this, he will offset the lower price which he had received for his soybeans in the cash market by the gain of 30 cents which he had achieved in the futures market.

CURRENT EVENTS

The latest price chart for soybeans is given below:

The prices in the above article are increasing. This chart has been taken from a recent article that was issued in November 2014. Apart from this another two articles were published in November 2014. One of the article which was issued on 10^th November 2014, stated that the corn crop in US, which is currently holding a record, but it would be slightly below the recent market expectations. This was according to the government data issued on Monday and this will drive the corn prices to fall and on the other hand the soybean production will increase. The main story in the year 2014 is that soybean crops had resulted in less than burdensome year ending commodity...........................

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