Fundamentals Of Corporate Finance, 9th Edition
9th Edition
ISBN: 9781260052220
Author: Richard Brealey; Stewart Myers; Alan Marcus
Publisher: McGraw-Hill Education
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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.
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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
Fundamentals Of Corporate Finance, 9th Edition
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