Finance Case – Question and Answers
Answer the following two items.
You are the purchasing agent for a beef processing plant. You plan to purchase 1.44 million pounds of cattle in July 2011. You would like to lock in your costs today. Using live cattle futures data, determine the number of contracts required and what position you would take to deal with your problem. Determine your profit or loss position if the live cattle price at the expiration of your contract is 5% higher than it is today. Determine your profit or loss position if the live cattle price at the expiration of your contract is 5% lower than it is today. [answer should only be approximately 1/3 to 1/2 page in length]
1 contract = 40,000 pounds
Contracts to be purchased = 1.44 million/40,000 = 36 contracts
Position = $ 122.075*36*40,000 = 175788000
Since the price of the cattle future will go down, I would go short on the contract.
Gain if 5 percent higher (175788000*5%) = 8789400
Value of position if 5 percent higher = 175788000+ 8789400 = 184577400
Value of position if 5 percent lower than today = 175788000 – 8789400 = 166998600
Using Yahoo or another financial web site, find option prices for Proctoer & Gamble. Compare and contrast information on July 2011 options to January 2012 options. Focus only on options with a strike price of $55 and $75. Be as specific as possible. [answer should only be approximately 3/4 to 1 page in length]
Call option for P&G for Jul 2011
Call Options
Expire at close Friday, July 15, 2011
Strike
Symbol
Open Int
55.00
PG110716C00055000
0.25
57.50
PG110716C00057500
60.00
PG110716C00060000
0.02
2,256
62.50
PG110716C00062500
0.02
9,228