Finance Case - Question and Answers

Answer the following two items.

1. 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

2. 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 Last Chg Bid Ask Vol Open Int

55.00

PG110716C00055000

7.25 0.25

7.25 7.40 8 366

57.50

PG110716C00057500

4.80 0.00 4.70 5.10 4 602

60.00

PG110716C00060000

2.95 0.02

3.00 3.05 50 2,256

62.50

PG110716C00062500

1.48 0.02

1.53 1.54 7 9,228