Fundamentals of Corporate Finance, 11th Edition (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9781259298707
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 23, Problem 1QP
Summary Introduction
To determine: The profit or loss from the cocoa futures contract at the expiration.
Introduction:
The futures contract is used particularly to protect investors from the potential risk. This contract is made generally on the trading floor of an organized exchange to buy or sell a financial instrument or a particular commodity at a predetermined price and time in future.
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Question 5
The March 2024 S&P 500 cash index is 930 while the S&P 500 futures index is 950 and the contract value of each index point is $100. You are convinced the futures market will rise 10% by expiry. You are only prepared to buy or sell one futures contract.
(i) Will you buy or sell a contract in the futures market? (2 marks)
(ii) What is your profit (+) in dollars if you are correct? (2 marks)
(iii) What is your profit (+)/loss (-) if the futures price on expiry is 1200? (2 marks)
(iv) What is your profit (+)/loss (-) if the futures price on expiry is 700? (2 marks)
(v) Explain what is meant by “initial margin” on a futures contract. (2 marks)
D6
Suppose the ASX200 Index is currently at 7,406, the expected dividend yield on the index is 2 percent per year, and the risk-free rate is 0.35%. Using the current price of ASX200 futures contracts that expire in six months recommend a program trading strategy for buying or selling the futures?
Q3 [Hull, Practice Question 5.22 on p.127]The 2-month interest rates in Switzerland and the United States are, respectively, 1%and 2% per annum with continuous compounding. The spot price of the Swiss francis $1.0500. The futures price for a contract deliverable in 2 months is $1.0500. Whatarbitrage opportunities does this create?Hint: The theoretical futures price is1.0500 ∗ ?(???− ???)∗(212) =? ? ?The actual futures price is too ____. This suggests that the arbitrageur should sell______ for ______ and buy Swiss francs back in the futures market.
Chapter 23 Solutions
Fundamentals of Corporate Finance, 11th Edition (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 23.1 - Prob. 23.1ACQCh. 23.1 - Prob. 23.1BCQCh. 23.2 - Prob. 23.2ACQCh. 23.2 - Prob. 23.2BCQCh. 23.3 - What is a forward contract? Describe the payoff...Ch. 23.3 - Prob. 23.3BCQCh. 23.4 - Prob. 23.4ACQCh. 23.4 - Prob. 23.4BCQCh. 23.5 - Prob. 23.5ACQCh. 23.5 - Prob. 23.5BCQ
Ch. 23.5 - Prob. 23.5CCQCh. 23.6 - What is a futures option?Ch. 23.6 - Prob. 23.6CCQCh. 23 - Keith is preparing a graph that compares the value...Ch. 23 - Prob. 23.3CTFCh. 23 - Prob. 23.6CTFCh. 23 - Prob. 1CRCTCh. 23 - Prob. 2CRCTCh. 23 - Prob. 3CRCTCh. 23 - Prob. 4CRCTCh. 23 - Prob. 5CRCTCh. 23 - Prob. 6CRCTCh. 23 - Options [LO4] Explain why a put option on a bond...Ch. 23 - Prob. 8CRCTCh. 23 - Prob. 9CRCTCh. 23 - Prob. 10CRCTCh. 23 - Prob. 11CRCTCh. 23 - Hedging Exchange Rate Risk [LO2] If a U.S. company...Ch. 23 - Hedging Strategies [LO1] For the following...Ch. 23 - Prob. 14CRCTCh. 23 - Prob. 15CRCTCh. 23 - Prob. 16CRCTCh. 23 - Prob. 1QPCh. 23 - Prob. 2QPCh. 23 - Futures Options Quotes [LO4] Refer to Table 23.2...Ch. 23 - Prob. 4QPCh. 23 - Futures Options Quotes [LO4] Refer to Table 23.2...Ch. 23 - Prob. 6QPCh. 23 - Prob. 7QPCh. 23 - Interest Rate Swaps [LO3] ABC Company and XYZ...Ch. 23 - Prob. 9QPCh. 23 - Prob. 10QPCh. 23 - Prob. 1MCh. 23 - Prob. 2MCh. 23 - Prob. 3MCh. 23 - Prob. 4MCh. 23 - Prob. 5MCh. 23 - Are there any possible risks Joi faces in using...
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- The January 2023 S&P 500 cash index is 3950 points while the S&P 500 futures March 2023 index is 4000 and the contract value of each index point is $150. You are convinced the futures market will fall 20% by expiry. You are only prepared to buy or sell one futures contract. (i) Will you buy or sell a contract in the futures market? (ii) What is your profit (+) in dollars if you are correct? (iii) What is your profit (+)/loss (-) if the futures price on expiry is 4400? (iv) What is your profit (+)/loss (-) if the futures price on expiry is 3700? (v) Explain how a fund manager that is manging $100 million pension fund that track the S&P 500 index who is concerned the spot index will be 3200 on date of expiration of the futures contract in March 2023 can hedge the risk to the pension fund. Explain the net position if on the March expiration the index reads 3000 or 4500.arrow_forwardA) It is now January. The current interest rate is 5% per annum annual compounding. The June future price for gold is $1846.30, while the December future rice is $1860.00. Find a strategy to explore the arbitrage opportunity. B) Suppose that the spot price of the euro is currently $1.5 USD. The one-year futures price is $1.55 USD. Is the interest rate higher in the United States or the euro zone? Justify your answer. C) OneAsx has just introduced a single-stock futures contract on Arandex stock, a company that currently pays no dividends. Each contract calls for delivery of 1,000 shares of stock in one year. The T-bill rate is 6% per year annually compounded and Arandex stock currently sells at $120 per share. If the Arandex price drops by 3%, what will be the change in the future price and the change in the investors’ margin account who has a long position in one contract?arrow_forward00 : 08 : 56 A futures price is currently 60 and its volatility is 30%. The risk free interest rate is 8% per annum. Use a two step binomial tree to calculate the value of a six month European call option on the futures with a strike price of 60? If the call were American, would it ever be worth exercising it early? Show workings and your binomial tree.arrow_forward
- 6.Assume we have the following information: Spot price : 1146.00 Actual futures price : 1192.50 Theoretical futures price : 1160.00 Maturity : 3 months a. Is the futures fairly priced? Suppose an arbitrageur wish to take advantage of this opportunity. He has RM10,000,000.00 which he can fund at the current risk-free rate of 5%. b. What should he do? c. How many contracts should be shorted or bought? d. Assume that the arbitrageur maintains this position until contract expiry at which time futures and cash prices have converged to 1165. How much profit would he makes?arrow_forwardwhich one is correct please confirm? Q13: "If a firm is due to be paid in deutsche marks in two months, to hedge against exchange rate risk the firm should" sell foreign exchange futures short. buy foreign exchange futures long. stay out of the exchange futures market. none of the abovearrow_forwardMf2. Suppose you took a long position in a September T-bill futures priced at IMM index 95.5. What would be your profit or loss on the position if the price of a spot 91-day T-bill were trading at YTM of 5% at the September expiration?arrow_forward
- Question 8 The treasure of a US-based multinational expects to deposit about £30 million in cash in May for a number of months, and is worried that short-term interest rates on sterling will soon fall. It is now December. Which of the following woud be an appropriate hedging transaction with futures? A) Sell June sterling futures B) Sell March sterling futures C) Buy March sterling futures D) Buy June sterling futuresarrow_forwardV7. A stock price is currently $232. It is known that at the end of seven months itwill be either $260 or $210. The risk-free interest rate is 3.5% per annum with continuouscompounding. hat is the value of a seven-month European put option with a strike priceof $240? Use no-arbitrage arguments.arrow_forwardMarket observes the “exchange rates” as of today:($1/$0)=0.95 , ($2/$0)=0.87 1. What is the implied interest rate between time t=0 and t=2 ? 2. Now there is a project with three certain cashflows:CF0=−$10MMCF1=$5MMCF2=$7MMWhat is NPV0? 3. How much is CF1 worth at t=2?arrow_forward
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