Question

Question 5 (20 points) You want to create a virtual hot-rolled coil (HRC) steel mill with a capacity of 1,000 tons/month using the futures market to benefit from the spread between the inputs and the output. Assume your costs are: 2 tons of iron ore and 1 ton of coking coal ton of steel and your output is hot-rolled coil steel. Future contracts are available on hot-rolled steel, iron ore, and coking coal. You are bullish that from T-O to T-1 the spread between the price of hot-rolled steel will rise (the price change in hot rolled coil will exceed price changes in the inputs over the period). Call this the output-input spread" You want to build" your steel mill to reflect that. Required Inputs to produce one ton of hot-rolled steel coil used for appliances): 2 tons of pure iron ore 1 Ton of Hot-rolled Coil Steel 1 ton of coking coal The details of the market: (Note the difference between T-0 spot and futures price) Summary Table T-O Spot price TO future Te1 future Contract size (tons) 1000 $200 Price/Ton HRC Steel Iron Ore Coking Coal S198 $1.39 $ $135 Initial Margin $6,000 $5.000 $1,200 $140 1000 $33 $32 542 1000 1) (3 points) At T-0, are the future prices of HRC, Iron Ore and Coking Coal selling at a Premium or Discount to spot prices? 2) (6 points) Calculate the T=0 value of each of the futures contract: HRC, Iron Ore, and Coking Coal.

Answer 1

Notes ant To the Jutare pra below fitore price ghost $203 spot price of ARC stoc for $ 108 is at $2 premium compared to spot puce Ano Iron ore is at presum as pt calculden At T=0 future price of Iron are for $140 Iron auton = 139 This Iron are as at $ 1 premion compared

Notes Part 2 Date Sun Mon Tue Wed Thu Fri Sal As At T-o the Coking coal is discount to price of as por calculation below At Tzo future price of coalay cool for Spot price of cooking cool tona This Thes Cooking Cool is at $ I discount Lcompared to spot price of cooly cool 2 Ano:- At T=0 value of future contract Price ton To future (tons $ 200 $140 Contract size HRC Iron ore 1000 Cosly cash

Notes Prues Date therefore, at I o Value of future contract of HRC is caluleted as future value of HRC An- Contract site in tons - 1000 So at T=0 value of X Contrad are = $200 x 1000 $200000 Hec content = value alone At Tuo HRC foxtrots van b) At T=0 future value of Iron ore ton = $40 contract size in ton = 1000 so at Teo value of Iron ore contract = Iron ore ton & Contract sie AL To Iron.ou Contract vole $140 X 1000 & 140000 fane

Date: Notes Sun Mon Tue Wed Thu (PAGE 4 ). At, T = o futne values of coal coalftone of Contract size=1000 in ton 40 e o value cercely coral contract value of coal ton x contract size 32 too $32000 coach cated iobe - $32000