EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Question
Chapter 23, Problem 3PS
Summary Introduction
To think critically about: Effectiveness of the hedging for the oil and gold firm when firm wishes for short maturity.
Introduction: Hedging of the risk in oil-producing and gold mining is decided by the storage cost and convince. Oil trading is effected by the long term changes in prices but not effected in gold mining.
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Students have asked these similar questions
Both gold-mining firms and oil-producing firms might choose to use futures to hedge uncertainty in future revenues due to price fluctuations. But trading activity sharply tails off for maturities beyond one year. Suppose a firm wishes to use available (short maturity) contracts to hedge com-modity prices at a more distant horizon, say, four years from now. Do you think the hedge will be more effective for the oil- or the gold-producing firm?
Suppose that the current spot price of corn is $720 per bushel. The one year risk-free rate is 6% per annum. The futures price for delivery of one bushel of corn in one year’s time is $792 per bushel. Assume that net costs (storage costs minus convenience yield) are $15 per bushel (over the next one year). Is the futures contract correctly priced? If not, what is the theoretically correct price for the futures contract and how could you take advantage of any mispricing?
Please show full steps and explain.
Union Corp must make a single payment of €5 million in six months at the maturity of a payable to a French firm.
The finance manager expects the spot price of the € to remain stable at the current rate of $1.60/€.
But as a precaution, the manager is concerned that the rate could rise as high as $1.70/€ or fall as low as $1.50/€.
Because of this uncertainty, the manager recommends that Union Corp hedge the payment using either options or futures.
Six months Call and Put options with an exercise price of $1.60/€ are available.
The Call sells for $.08/€ and the Put sells for $.04/€.
A six month futures contract on € is trading at $1.60/€.
Should the manager be worried about the dollar depreciating or appreciating?
If Union Corp decides to hedge using options, should it buy Calls or Puts to hedge the payment? Why?
If futures are used to hedge, should the company buy or sell € futures? Why?
What will be the net payment on the payable if an option contact was used?
assume…
Chapter 23 Solutions
EBK INVESTMENTS
Ch. 23 - Prob. 1PSCh. 23 - Prob. 2PSCh. 23 - Prob. 3PSCh. 23 - Prob. 4PSCh. 23 - Prob. 5PSCh. 23 - Prob. 6PSCh. 23 - Prob. 7PSCh. 23 - Prob. 8PSCh. 23 - Prob. 9PSCh. 23 - Prob. 10PS
Ch. 23 - Prob. 11PSCh. 23 - Prob. 12PSCh. 23 - Prob. 13PSCh. 23 - Prob. 14PSCh. 23 - Prob. 15PSCh. 23 - Prob. 16PSCh. 23 - Prob. 17PSCh. 23 - Prob. 18PSCh. 23 - Prob. 19PSCh. 23 - Prob. 20PSCh. 23 - Prob. 21PSCh. 23 - Prob. 22PSCh. 23 - Prob. 23PSCh. 23 - Prob. 24PSCh. 23 - Prob. 25PSCh. 23 - Prob. 26PSCh. 23 - Prob. 1CPCh. 23 - Prob. 2CPCh. 23 - Prob. 3CPCh. 23 - Prob. 4CPCh. 23 - Prob. 5CPCh. 23 - Prob. 6CPCh. 23 - Prob. 7CPCh. 23 - Prob. 8CP
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