Cotton Futures Essay

2196 words - 9 pages

Executive Summary Portfolio Bought a Portfolio 1000 of Cotton Futures On Nov 8th 2001 at $32.15 Primary Asset Value is (1000 X $32.15) = $ 32,150.00 Primary Asset Cost to me (Primary Asset Value X Margin Cost (6%)) = $1929.00 Sold 1000 of Cotton Futures on Nov 16th 2001 at $ 34.71 Primary Asset Value is (1000 X $34.71) = $ 34,710.00 Primary Asset Cost to me (Primary Asset Value X Margin Cost (6%)) = $2082.60 Bought CRC Futures 1000 on Nov 8th 2001 at 187.61 Primary Hedge Value (1000 X $ 187.61) = $ 187,610.00 Primary Hedge Asset Cost ($187,610.00 X 6%) = $11,256.60 Sold CRC Futures 1000 on Nov 9th 2001 at 189.03 Primary Hedge Value is (1000 X $ 189.03) = $ 189,030.00 Primary Hedge Cost ($189,030.00 x 6%) = $ 11,341.80 Entry and Exit Points on Primary Asset Market Entry Point on Nov 8th 2001 : 3215 Profit Exit Point : 3415 Loss Exit Point : 3015 Profit Analysis on Primary Asset Profit from Asset = Primary Asset Value at Sold - Primary Asset Value at Cost $34,710 - $32,150 Profit from Primary Asset = $2560.00 Primary Asset Holding Period Return Hold Period Return = Primary Asset Profit X (360 days / No. of holdingdays) ------------------------ Primary Asset Cost Hold Period Return = 9555.20 % Hedging Analysis For Hedging purpose we will use CRC Futures as it includes Soybean futures Hedge Asset Holding Period ReturnHolding Period Return = (189,030.00- 187,610.00)/ 11256.60 x (360/1) Holding Period Return = 4541.3357% Total Portfolio Holding Period Return: Total Portfolio Profit $ 2560.00 ---------------------------- --------------= Total Portfolio HPR 1398.24% Total Portfolio Cost $13,185.60 Cotton Futures: Cotton Futures are being traded for last couple of years because of the scarcity of cotton due to high demand of cotton for textile industry. Cotton futures were introduced in order to make sure that suppliers and buyers were covered for the price fluctuation in the market place. More than 90% of cotton futures contracts are settle on paper only, it is very rare that contracts are physically executed. But in countries like India were cotton is grown in good quantities cotton futures have not helped much because contracts have been executed on maturation in past years. Reason behind executing these contracts was that people were trying to speculate too much on the market and during the time of execution, as they did not have the sources available they made the deliveries. Cotton futures are traded in New York and one contract is made of 50,000 lbs (i.e. 100bales of raw cotton). Price variance of cotton is based on the type of cotton, quality and where it is grown. Best time to trade is March, May, July, October and November.Bench Marking for Future Trading: Bench Mark has been set for dealing in cotton futures to control the...

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