Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Question
Chapter 26, Problem 27PS
a.
Summary Introduction
To discuss: The company P makes profit or loss from futures contract and whether it’s come under the cost of buying platinum.
b.
Summary Introduction
To compute: .The profit or loss and total cost of platinum if spot price rise to 1400 after three months.
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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?
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
Suppose 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.
Chapter 26 Solutions
Principles of Corporate Finance
Ch. 26 - Vocabulary check Define the following terms: a....Ch. 26 - Prob. 2PSCh. 26 - Catastrophe bonds On some catastrophe bonds,...Ch. 26 - Futures and options A gold-mining firm is...Ch. 26 - Prob. 5PSCh. 26 - Prob. 6PSCh. 26 - Futures contracts List some of the commodity...Ch. 26 - Prob. 8PSCh. 26 - Futures prices Calculate the value of a six-month...Ch. 26 - Futures prices In December 2017, six-month futures...
Ch. 26 - Prob. 11PSCh. 26 - Prob. 13PSCh. 26 - Prob. 15PSCh. 26 - Prob. 16PSCh. 26 - Prob. 17PSCh. 26 - Convenience yield In March 2018, six-month bitcoin...Ch. 26 - Prob. 19PSCh. 26 - Prob. 20PSCh. 26 - Total return swaps Is a total return swap on a...Ch. 26 - Prob. 22PSCh. 26 - Prob. 23PSCh. 26 - Hedging What is meant by delta () in the context...Ch. 26 - Hedging You own a 1 million portfolio of aerospace...Ch. 26 - Prob. 26PSCh. 26 - Prob. 27PSCh. 26 - Prob. 28PSCh. 26 - Hedging Price changes of two gold-mining stocks...Ch. 26 - Prob. 30PSCh. 26 - Prob. 31PSCh. 26 - Prob. 32PSCh. 26 - Prob. 33PSCh. 26 - You are a vice president of Rensselaer Advisers...
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