EBK FUNDAMENTALS OF CORPORATE FINANCE
9th Edition
ISBN: 9781260049237
Author: BREALEY
Publisher: MCGRAW HILL BOOK COMPANY
expand_more
expand_more
format_list_bulleted
Question
Chapter 24, Problem 10QP
a)
Summary Introduction
To discuss: Whether the company P has a profit or loss on futures agreement.
b)
Summary Introduction
To discuss: Whether it is locked in the cost of buying platinum it requires.
c)
Summary Introduction
To discuss: Whether the company P has a profit or loss when the spot price upsurges to $1800.
d)
Summary Introduction
To discuss: The alteration in the answer of part b.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Phoenix Motors wants to lock in the cost of 10,000 ounces of platinum to be used in next quarter's production of catalytic converters. It
buys three-month futures contracts for 10,000 ounces at a price of $1,290 per ounce.
Suppose the spot price of platinum falls to $1,195 in three months' time, answer the following:
a-1. Calculate the profit or loss on the futures contract.
Note: Enter the amount as a positive value.
a-2. What is the total cost to Phoenix of buying the platinum?
Suppose the spot price of platinum increases to $1,405 after three months, answer the following:
b-1. Calculate the profit or loss on the futures contract.
Note: Enter the amount as a positive value.
b-2. What is the total cost to Phoenix of buying the platinum?
a-2. Total cost
b-2. Total cost
On the London Metals Exchange, the price for copper to be delivered in one year is $5,740 a ton. (Note: Payment is made when the copper is delivered.) The risk-free interest rate is 2.00% and the expected market return is 10%.
a. Suppose that you expect to produce and sell 12,100 tons of copper next year. What is the PV of this output? Assume that the sale occurs at the end of the year. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
b-1. If copper has a beta of 1.26, what is the expected price of copper at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b-2. Assume copper has a beta of 1.26. What is the certainty-equivalent end-of-year price?
Assume the current price of copper is $1675 per tonne, the term structure of interest rate is flat at
6% continuous compounding and proportional storage cost of copper is 1%. Suppose that the 6
month forward price for copper is $1700 per tonne, how can you make a riskless profit?
Enter a long position in the forward contract, sell copper and invest excess funds
Borrow to buy and store the copper and enter a short position in the forward contract
Enter a short position in the forward contract, sell copper and invest excess funds
O Borrow to buy and store the copper and enter a long position in the forward contract
O Arbitrage is not available
Chapter 24 Solutions
EBK FUNDAMENTALS OF CORPORATE FINANCE
Knowledge Booster
Similar questions
- Consider a producer who is in the business of producing Cocoa for future sale. At the time of 0 (i.e., present time), we have S(O) = $1652, F(0) = $1675. The firm is expecting to sell the Cocoa in 2 months, while the delivery date of the futures contract is 3 months away. Assume that the price of Cocoa in two months is unpredictable, but we know that the future price in two months will be $8 higher than the spot price of Cocoa in two months (i.e., F(t) = S(t) + $8). Question 18. Without hedging, what is the firm's net profit at date t (i.e., in two months)? A) $23 B) $8 C) $31 D) $15arrow_forwardSuppose that your company is planning to sell 1.25 million litres of fuel in two years. Thecurrent price of fuel is £1.60 per litre. a) Suppose there is a two-year heating oil futures contract available. The futuresprice is £1.63 per litre. How many contracts would you need to fully eliminate yourrisk exposure over the next two years? How many contracts would you need ifyour optimal hedging ratio was 0.75? What position in these contracts would youtake today? Explain. b) Evaluate the outcomes of your hedging strategy if the price of fuel in two years is(1) £1.72 per litre, and (2) £1.58 per litre. In each case assume the heating oilfutures price to be equal to that of the fuel. Comment on your results.arrow_forwardSuppose the initial margin on heating oil futures is $8,400, the maintenance margin is $7,200 per contract, and you establish a long position of 10 contracts today, where each contract represents 42,000 gallons. Tomorrow, the contract settles down $0.04 from the previous day’s price. Are you subject to a margin call? Why or why not? What is the maximum price decline on the contract that you can sustain without getting a margin call?arrow_forward
- (1) A trader signs a Forward contract on April 30 for the delivery of 500 gallons of oil on October 31. The risk-free rate is 5.00% on April 30 and the current price of oil is $30 per gallon. Each gallon of storage costs $0.03 per day.a. What will be the fair forward price on April 30?b. If the spot price of oil is $45 per gallon on July 31, what profit or loss would the trader incur if they close out (cash settle) their position?arrow_forwardA short forward contract on an investment asset that yields 7.2% and was negotiated some time ago will expire in 10 months and has a delivery price of $68. The current spot price of the commodity is $48. The risk-free interest rate (with continuous compounding) is 3.5%. What is the value of the short forward contractarrow_forwardSuppose the initial margin on heating oil futures is $20, 200, the maintenance margin is S 16, 500 per contract, and you establish a long position of 12 contracts today, where each contract represents 27,000 gallons. Tomorrow, the contract settles down 5.07 from the previous day's price. What is the maximum price decline on the contract that you can sustain without getting a margin call?arrow_forward
- consider a one-year forward contract on gold. Suppose that it costs $2 per ounce per year to store gold with payment being made at the end of the year. Assume that the spot price is $450 per ounce and the risk-free rate is 7% per annum for all maturities. Assume continuous compounding. (a) What is the forward price F (0, 1) that does not result in arbitrage profit? (b) If the forward price is $460, do you get any arbitrage profit opportunity? If so, what is your strategy? (You need to provide more than "buy low, sell high".)arrow_forwardProblem 2.23. Suppose that on October 24, 2015, a company sells one April 2016 live-cattle futures contracts. It closes out its position on January 21, 2016. The futures price (per pound) is 121.20 cents when it enters into the contract, 118.30 cents when it closes out its position, and 118.80 cents at the end of December 2015. One contract is for the delivery of 40,000 pounds of cattle. What is the total profit? How is it taxed if the company is (a) a hedger and (b) a speculator? Assume that the company has a December 31 year end.arrow_forwardA short forward contract on a commodity that was negotiated some time ago will expire in 9 months and has a delivery price of $58. The current spot price of the commodity is $58. The risk-free interest rate (with continuous compounding) is 4.1%. What is the value of the short forward contract?arrow_forward
- A farmer shorts cocoa futures for 500 tons at RM6,000 per ton. The exchange requires him to post RM300,000 as the initial margin, and sets the maintenance margin at RM250,000. At what price change the margin call level will be triggered? What is the margin call price?arrow_forwardSeveral months ago, you took a long position on a forward contract for gold. The contract's forward delivery price is $143,000, and it is set to expire in three months. The current spot price of gold is $142,000 and the annual risk-free interest rate is 5% compounded continuously. What is the current value of the forward contract that you are holding? A. SO B. + $786.14 C. - $786.14 D. $143,786arrow_forwardSuppose a Japanese company, Matsushita, has to sell Can$ 50 m sometime during the next 6 months, and would like to lock in a minimum ¥ value. The price of a put option with a strike price of K = ¥ 230/$ is ¥ 4/$ What is the actual amount that they receive if the spot rate at the end of 3 months is 245/$?Since ST >K, the options are worthless and Matsushita can do better by selling at the market rate of ¥ 245/$, rather than the exercise price of ¥ 230/$. Thus, their total receipts will be CV234/$ C¥230 / $ C¥241/$ C¥4/$arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education