ARE 139 – How much would a farmer receive for corn taken to an elevator

Final, ARE 139, SQ 2012Name ________________________________ Seat __________120 total points (for the number of minutes).Notes and textbooks allowed. In contrast, no electronic devices are allowed. Computationsshould be possible without a calculator, but a calculator may be used with a proctor’ssupervision.1.(48 points) On the first day of July one year, the corn futures market had closing prices for the soon-­‐to-­‐expire July contract at 610.75 cents per bushel, for September at 604.50, and for December at 585.25. These prices partly reflected immediate export demand at the Gulf, so much so that corn available at the Gulf by July 15 was distinguished from corn available the second half of July. Deliveries on corn futures contracts have to be made by the short by July 15. What is delivered is a shipping document (corn on barges, that is) issued by elevators along the Illinois River, which the holder can present to the elevator for prompt loading. Physical corn by time and location were thus quoted as: Truck bids, Illinois RiverFOB, Illinois RiverNOLA, first-half JulyNOLA, second-half July–8+3+58+56JulyJulySeptSeptThe prevailing barge rate (barges can be used to move, corn, wheat, soybeans, or even coal)for the downriver trip of two weeks was 50 (cents per bushel of corn).a) (6 points) Explain in words the second row of this table.b) (4 points) How much would a farmer receive for corn taken to an elevator on the IllinoisRiver in early July (the transportation cost to the elevator aside)?c) (10 points) How much would it seem (no quotation is given) that the farmer wouldreceive if he delayed taking the corn to the river elevator until the second half of July?Would that price imply a reasonable return for storing the corn for the two weeks?(Provide numbers to support your argument.)d) (4 points) What is the name for the intertemporal relationship in NOLA for corn?(Provide numbers to support your argument.)e) (12 points) To fulfill a commitment to an Asian importer, an exporter wants corn at theGulf the second half of July. The straightforward way is to buy NOLA second-half July.Would any alternatives among those implicit here be cheaper for that exporter? (Providenumbers to support your argument.)f) (6 points) Depending on your answer to e), how does the exporter make use of the cornfutures market? What name would commonly apply?g) (6 points) How does your answer to e) relate to the concept of covered interest parity?2.(72 points) Please read the attached article from the Wall Street Journal on June 8, 2012 reporting on the natural gas futures market the day before. Also attached is the CME’s Daily Bulletin for June 7 for natural gas (Henry Hub is an important pipeline interconnect in Louisiana) and one page of the related options markets. The report referred to in the article was released at 10:30 Eastern Time by the U.S. Energy Information Administration. It covered the week ending June 1. Because the dates do not coincide, also attached are two, not one, Large Trader reports from the CFTC. (A complexity is that prices for natural gas are quoted in million British Thermal Units, while many quantities are given in cubic feet, often, as in this article, in Billion Cubic Feet – Has no one heard of the metric system? A MMBTU is approximately the energy in 1,000 cubic feet of natural gas. 1 BCF is effectively the size of 100 futures contracts.) a) (10 points) Why should the natural gas futures market react by –6.1% to anunexpected increase in the amount in stocks of 5/2877 = +0.2%?b) (12 points) As a commodity is put into storage, what usually happens to the collectiveposition of commercial firms in the futures market? Does that seem to have happenedin this instance for natural gas?c) (10 points) In the article, Stephen Schork is quoted as saying “Come August, peopleare going to be searching for storage [facilities].” Are futures prices for June 7consistent with his statement? (Refer to specific prices.)d) (8 points) Compare the behavior on June 7 of the July ’12 contract with the July ’13contract. Why should the surprise about current conditions for storage, those in theweek ending June 1, 2012, influence the price of the July ’13 contract at all?e) (8 points) Regarding the July ’13 contract, the CME provides the information3.420B/3.347A. What do these numbers mean? How do they relate to the number 471provided on the same row?Regarding the options on natural gas futures, consider specifically the 2.5000 July ’12 call.f) (6 points) Explain in that row the numbers 2498 and 170.g) (8 points) Another number in that row is .2261. Explain that number in that row andhow the CME derived it.h) (10 points) According to the article, the stocks report took the market by surprise, soprices moved. Options reflect the possibility of price movements. Using this 2.5000July ’12 call as the example, what does the option market itself say about thepossibility of further surprises? (No precise answer is possible – explain yourreasoning.)