CORPORATE FINANCE CUSTOM W/CONNECT >BI
11th Edition
ISBN: 9781307036633
Author: Ross
Publisher: MCG/CREATE
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Chapter 25, Problem 6CQ
Summary Introduction
To explain: The pros and cons of buying futures contract or call options if the price of the cotton moves in adverse direction.
Options:
Options provide the estimation of financial instrument which would be purchased in near future. To purchase the option, the premium amount is paid by the person who has the right to execute the transaction.
Futures contract:
Futures contract refers to a contract in which the two parties agree to trade any asset or commodity at the present price executable in future. In futures contract the delivery of product and payment activities would be execute in the near future.
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The futures market is referred to as an auction market, whereby producers and suppliers of commodities endeavour to avoid market volatility; in other words, producers and suppliers negotiate contracts with an investor who agrees to take on probable risk and reward, based on the expected volatility of the market.
Critically discuss the theoretical concept of futures contracts as a risk management tool, used by any would be investor to decrease future risk exposure or market volatility.
What were the main reasons for this fall into the negative realm? Critically discuss.
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A long position means expecting the asset's price to rise, and a short position means expecting it to fall.
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Chapter 25 Solutions
CORPORATE FINANCE CUSTOM W/CONNECT >BI
Ch. 25 - Prob. 1CQCh. 25 - Prob. 2CQCh. 25 - Prob. 3CQCh. 25 - Prob. 4CQCh. 25 - Prob. 5CQCh. 25 - Prob. 6CQCh. 25 - Option Explain why a put option on a bond is...Ch. 25 - Hedging Interest Rates A company has a large bond...Ch. 25 - Prob. 9CQCh. 25 - Prob. 10CQ
Ch. 25 - Prob. 11CQCh. 25 - Prob. 12CQCh. 25 - Prob. 13CQCh. 25 - Prob. 14CQCh. 25 - Hedging Strategies William Santiago is interested...Ch. 25 - Prob. 16CQCh. 25 - Prob. 1QPCh. 25 - Prob. 2QPCh. 25 - Prob. 3QPCh. 25 - Prob. 4QPCh. 25 - Prob. 5QPCh. 25 - Duration What is the duration of a bond with three...Ch. 25 - Duration What is the duration of a bond with four...Ch. 25 - Duration Blue Stool Community Bank has the...Ch. 25 - Prob. 9QPCh. 25 - Prob. 10QPCh. 25 - Prob. 11QPCh. 25 - Prob. 12QPCh. 25 - Prob. 13QPCh. 25 - Forward Pricing You enter into a forward contract...Ch. 25 - Forward Pricing This morning you agreed to buy a...Ch. 25 - Prob. 16QPCh. 25 - What is the monthly mortgage payment on Jerrys...Ch. 25 - Prob. 2MCCh. 25 - Prob. 3MCCh. 25 - Prob. 4MCCh. 25 - Suppose that in the next three months the market...Ch. 25 - Are there any possible risks Jennifer faces in...
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- Which is a key difference a manager should note in choosing between forward and futures contracts?a. Exchange trading makes forward contracts more liquid.b. Futures contracts carry standardized terms, while forward contracts can be tailored to meet specific needs.c. Futures contracts have greater default risk than forward contracts.d. Forward contracts require initial margin deposits and daily marking to market, while futures do not.arrow_forwardUsers of commodities are: Answer a. Usually not participants in futures contracts. b. Speculators preferring to get the large returns that result from large risk. c. Buyers of futures d. Likely to take the short position in a futures contract.arrow_forwardThe ability to buy on margin is one advantage of futures. Another is the ease with which one can alter one’s holdings of the asset. This is especially important if one is dealing in commodities, for which the futures market is far more liquid than the spot market.arrow_forward
- Describe how commodity futures markets can beused to reduce input price risk.arrow_forwardUsers of commodities are: a. Usually not participants in futures contracts. b. Speculators preferring to get the large returns which result from large risk. c. Buyers of futures d. Likely to take the short position in a futures contract.arrow_forwardIn the futures markets, arbitrageurs are mainly interested in: a. reducing their exposure to risk of price changes. b. increasing market liquidity. c. reducing the spread between the bid and ask prices on bonds. d. attempting to make a profit by taking advantage of price differentials between different markets.arrow_forward
- Basis risk refers to the risk: a. associated with unanticipated price movements on the underlying asset. b. of default on the futures contract. c. associated with anticipated price movements in the cash market. d. from a change in the spread between the price on the commodity or financial security in the physical market and the price of the related futures contract.arrow_forwardSuppose, on a certain day in February, a speculator observes the following prices in the foreign exchange and currency futures markets: GBP/USD spot: 1.6465 March futures: 1.6425 September futures: 1.6250 December futures: 1.6130 The speculator thinks that the markets are overestimating the weakness of sterling (GBP) against the dollar. How can she act on this view to make a profit? Under what circumstances do her actions lead to a loss?arrow_forwardIf you expect a stock market downturn, one potential defensive strategy would be to __________. Group of answer choices buy stock index options sell foreign exchange futures buy stock index futures sell stock index futuresarrow_forward
- a)define and explain convenience yield, and describe how it is incorporated into the futures pricing model. b)discuss the debate on whether risk premium should be included in the pricing of futures and forward contracts. c) define backwardation, normal backwardation, contango, and normal contango. d) discuss the relationship between the prices of puts, calls, and forward/futures contracts on the same underlying asset using the put-call-forward/futures parity. e) discuss the boundary conditions on the prices of American and European call option contracts on futures.arrow_forward"Futures contracts allow individual investors to protect themselves against volatility in interest rates, exchanges rates, commodity prices and share prices" Do you agree with statement ? Explain?arrow_forwardDerivative securities play a large and increasingly important role in financial markets. These securities whose prices are determined by, or ‘derive from’, the prices of other securities are also called contingent claims because their payoffs are contingent on the prices of other securities. In relation to derivative markets, explain the following: call option, put option, exercise price, strike price, premium, in the money, out of the money, at the money, American option, European option.arrow_forward
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