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Analysis on Future Contract Price of Sugar

FIN 545: Options, Future & Other Derivatives

Presented To: Dr. Sarwar Uddin Ahmad Prepared By: Syed Mahmudul Quader : 1025075 Md.Fasi Uddin: 1025014 Satyajit Dhar : 1015059 Md. Faisal Mahamood: 1035065 Yusuful Haq: 0310128

Date 27th June 4th July

Responsibilities Market Monitoring, Data collection and Interpretation & Justification Margin Table & Net G/L Calculation

Member name Syed Mahmudul Quader Md. Fasi Uddin Yusuful Hoq Md. Faisal Mahmood Satyajit Dhar Syed Mahmudul Quader Md. Fasi Uddin Md. Faisal Mahmood Satyajit Dhar

Margin Table Net G/L Calculation

ACKNOWLEDGEMENT

First of all, we remember almighty Allah for giving us the opportunity and strength to carry on this thesis.

We express our heartfelt gratitude, deepest regard to our respected course instructor Dr. Sarwar Uddin Ahmad, School of Business, Independent University, Bangladesh, for his helpful advice and continuous encouragement throughout the progress of this work, without which the work could not have been completed.

1. Introduction------------------------------------------------------------------------------------------01 2. Our Product & Position----------------------------------------------------------------------------01 3. Reason for Choosing Sugar-----------------------------------------------------------------------01 3.1 Brazil ----------------------------------------------------------------------------------02 3.2 India ------------------------------------------------------------------------------------02 3.3 Australia -------------------------------------------------------------------------------02 3.4 Thailand --------------------------------------------------------------------------------03

4. Future Price Justification --------------------------------------------------------------------------03 5. World Monthly Refined Sugar Price Chart -----------------------------------------------------04 6. Margin Table ---------------------------------------------------------------------------------------05 7. Net Gain/Loss --------------------------------------------------------------------------------------06 8. Conclusion -----------------------------------------------------------------------------------------06

1. Introduction In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today (the futures price or the strike price) with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange. The party agreeing to buy the underlying asset in the future, the "buyer" of the contract, is said to be "long", and the party agreeing to sell the asset in the future, the "seller" of the contract, is said to be "short". The terminology reflects the expectations of the parties -- the buyer hopes or expects that the asset price is going to increase, while the seller hopes or expects that it will decrease. Note that the contract itself costs nothing to enter; the buy/sell terminology is a linguistic convenience reflecting the position each party is taking (long or short). While the futures contract specifies a trade taking place in the future, the purpose of the futures exchange institution is to act as intermediary and minimize the risk of default by either party. Thus the exchange requires both parties to put up an initial amount of cash, the margin. Additionally, since the futures price will generally change daily, the difference in the prior agreed-upon price and the daily futures price is settled daily also. The exchange will draw money out of one party's margin account and put it into the other's so that each party has the appropriate daily loss or profit. If the margin account goes below a certain value, then a margin call is made and the account owner must replenish the margin account. This process is known as marking to market. Thus on the delivery date, the amount exchanged is not the specified price on the contract but the spot value (since any gain or loss has already been previously settled by marking to market)

2. Our Product & Position: We have chosen Sugar as our product and we are holding the Long Future Contract position. 3. Reason for Choosing Sugar: In order to justify the reason of choosing Sugar as our product, we first need to evaluate the condition of the biggest exporters of sugar of the world. Brazil, Australia, India and Thailand are

the biggest exporters of Sugar in the world Market. Now we need to see what is exactly happening in these countries that encouraged us to choose this contract position 3.1 Brazil Brazils sugar-cane harvest usually runs from April to December, peaking between July and September. It was delayed this year because of rains. Unica in March estimated the main regions harvest at 568.5 million tons and said May 26 lower yields might result in a smaller crop than initially forecast. There is also congestion in the ports of brazil due to heavily queued shipments. 3.2 India Brazil, the world's largest sugar exporter, is the last big provider now left after main rival India turned from net exporter into a net importer of sugar on a steep drop in output. India is believed to have bought around 1.1 million tonnes of raw sugar from Brazil, some traders said. Sugar futures in New York went up again above the 23 cents per lb mark, close to the highest level in three decades 3.3 Australia Australia accounts for over 11% of all raw sugar trade between countries. The worst tropical cyclones on record hit the Queensland growing area of Australia, where sugar cane had already been severely impacted by recent flooding. This spawned fears among traders that the worldwide supply, now in a third straight year of deficits, wont be able to keep up with demand.

3.4 USA California District Court, the U.S. Court of Appeals for the Ninth Circuit ruled on Friday that Judge White erred in his ruling to destroy the GMO beet SEED crop (or stecklings), a crop that would ultimately provide the GMO seeds that would be needed for planting a GMO crop in the Spring of 2012. Thus, there is no green light for farmers to go ahead and purchase, and then plant, their GMO seeds. We see a very bright yellow caution light. We continue to believe that farmers will not plant a GMO crop, for the simple reason they face the real possibility that

future court decisions may force them to destroy those crops, leaving them unable to fulfill their contracts with the beet processors. The USDA estimated that shortfall at 37% of the total domestic sugar beet supply (equating to 16-17% of total sugar supply). Our discussions with industry sources suggest that the shortfall is likely to fall in the 20% range, barring extremely adverse planting and growing conditions. If 20% of the beet supply is gone, then 9% of the total supply is gone, bringing the projected September, 2012 ending stocks to about zero, absent further adjustments. 3.5 Thailand In Thailand, vessels are waiting to load as much as 7 percent of this years supply, according to Piromsak Sasunee, chief executive officer of Thai Sugar Trading Corp., the largest shipper. A shortage of barges, a sunken ship blocking the biggest river and a lack of labor delayed exports, he said.

4. Future Price Justification:

The above two graphs show the projection of the future settlement price for October 2011 contract for last one month and the year. Both of the graphs show the rising trend of the price, though it is slightly decreasing at the end. But as it has a rising trend over the past years and from

the above discussion on the condition of different exporting countries of sugar, we believe that the price will keep rising up.

5. World Monthly Refined Sugar Price Chart:

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Jan. 7.70 11.27 11.88 10.64 9.16 11.63 16.92 15.13 15.17 15.67 33.32 35.58

Feb. 7.67 10.65 10.80 11.10 9.54 12.09 19.99 14.92 16.61 17.60 32.28 33.98

Mar. 7.83 10.26 10.81 10.51 10.59 12.02 20.45 15.59 15.79 17.83 24.53 32.49

Apr. 8.66 10.61 10.09 10.14 11.19 11.76 21.35 14.21 15.87 18.38 21.67 29.11

May June July Cent Per Pound 9.06 10.63 11.38 11.71 12.68 12.60 10.28 10.02 10.23 9.95 9.66 9.84 10.78 10.73 11.81 11.75 12.61 14.70 21.81 20.93 20.95 14.94 14.36 14.13 14.92 16.35 17.06 20.10 19.98 21.36 21.40 23.08 25.94 27.95 32.65

Aug. 11.29 12.08 10.33 9.74 11.80 14.81 18.16 12.87 17.92 24.89 25.32

Sep. 11.74 10.66 9.68 8.95 11.12 14.60 17.32 12.54 17.52 26.27 26.95

Oct. 11.76 10.19 9.72 8.39 11.21 14.18 17.92 12.56 15.07 26.50 31.21

Nov. 11.02 11.27 10.16 8.67 11.27 13.10 16.41 13.00 15.00 27.30 32.87

Dec. 10.95 11.52 10.25 9.23 11.23 15.00 15.86 13.78 14.27 29.71 34.78

6. Margin Table: Maintenance Margin= 5250 Initial Margin = 5775 Contract Size = 112,000

Day

Daily Gain/Loss

Total Gain/Loss

Margin Account 5775

Margin Call

27-Jun 28-Jun 29-Jun 30-Jun 1-Jul 5-Jul 6-Jul 7-Jul 8-Jul 11-Jul 12-Jul 13-Jul 14-Jul 15-Jul 18-Jul 19-Jul 20-Jul 21-Jul 22-Jul

0.2591 0.2701 0.2692 0.2634 0.2725 0.276 0.2768 0.2952 0.2936 0.2924 0.291 0.2902 0.2902 0.2897 0.2894 0.2878 0.2892 0.2985 0.3134

11.2 1232 -100.8 -649.6 1019.2 392 89.6 2060.8 -179.2 -134.4 -156.8 -89.6 0 -56 -33.6 -179.2 156.8 1041.6 1668.8

11.2 1243.2 1142.4 492.8 1512 1904 1993.6 4054.4 3875.2 3740.8 3584 3494.4 3494.4 3438.4 3404.8 3225.6 3382.4 4424 6092.8

5786.2 7018.2 6917.4 6267.8 7287 7679 7768.6 9829.4 9650.2 9515.8 9359 9269.4 9269.4 9213.4 9179.8 9000.6 9157.4 10199 11867.8

7. Net Gain/Loss Calculation: Considering 16% cost of capital and 10% income from Margin Account we have prepared the following table of Net Gain/Loss calculation.

Interest

Income from Margin A/C

Yearly Daily 27-Jun 28-Jun 29-Jun 30-Jun 1-Jul 5-Jul 6-Jul 7-Jul 8-Jul 11-Jul 12-Jul 13-Jul 14-Jul 15-Jul 18-Jul 19-Jul 20-Jul 21-Jul 22-Jul

2.53 2.53 2.53 2.53 2.53 2.53 2.53 2.53 2.53 2.53 2.53 2.53 2.53 2.53 2.53 2.53 2.53 2.53 2.53

1.58526027 1.92279452 1.89517808 1.71720548 1.99643836 2.10383562 2.12838356 2.6929863 2.64389041 2.60706849 2.56410959 2.53956164 2.53956164 2.52421918 2.5150137 2.46591781 2.50887671 2.79424658 3.25145205

Total Net Gain

48.07 6089.726

44.996

8. Conclusion: From the earlier discussion, as we assumed the price of the sugar will rise and eventually from the calculation of the margin table we see that the price actually increased and ultimately it gave us a net gain of \$6089.726. So, our prediction of future long contract ultimately paid off.

Bibliography:
1. http://www.ussugar.net/ 2. http://www.cmegroup.com/ 3. http://money.cnn.com 4. http://www.coffeeasean.org/details.asp?Object=5&News_ID=15679967 5. www.wikipedia.org