Loose Leaf for Foundations of Financial Management Format: Loose-leaf
17th Edition
ISBN: 9781260464924
Author: BLOCK
Publisher: Mcgraw Hill Publishers
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Question
Chapter 8, Problem 12DQ
Summary Introduction
To Explain: The term, “hedging�, which is used in the financial futures market to minimize risks.
Introduction:
Hedging:
It is the practice of preventing an investment from being exposed to risk against undesired price fluctuations. It is the strategical use of financial instruments for the purposes of offsetting risks.
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Students have asked these similar questions
which one is correct please confirm?
Q17: "When interest rates fall, a bank that perfectly hedges its portfolio of Treasury securities in the futures market"
suffers a loss
experiences a gain.
has no change in its income
none of the above.
which one is correct please confirm?
Q6:
Which of the following features of futures contracts were not designed to increase liquidity?
Standardized contracts
Traded up until maturity
Not tied to one specific type of bond
Marked to market daily
a) We can eliminate market exposure from our portfolio by shorting S&P500 index. Why bother with futures market? What are the disadvantages of using futures market for hedging?
Chapter 8 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
Ch. 8 - Under what circumstances would it be advisable to...Ch. 8 - Discuss the relative use of credit between large...Ch. 8 - Prob. 3DQCh. 8 - Prob. 4DQCh. 8 - Prob. 5DQCh. 8 - Prob. 6DQCh. 8 - Prob. 7DQCh. 8 - Prob. 8DQCh. 8 - Prob. 9DQCh. 8 - Prob. 10DQ
Ch. 8 - Prob. 11DQCh. 8 - Prob. 12DQCh. 8 - Compute the cost of not taking the following cash...Ch. 8 - Regis Clothiers can borrow from its bank at 17...Ch. 8 - Simmons Corp. can borrow from its bank at 17...Ch. 8 - Your bank will lend you $4,000 for 45 days at a...Ch. 8 - Prob. 5PCh. 8 - Prob. 6PCh. 8 - Mary Ott is going to borrow $10,400 for 120 days...Ch. 8 - Prob. 8PCh. 8 - Prob. 9PCh. 8 - Prob. 10PCh. 8 - McGriff Dog Food Company normally takes 27 days to...Ch. 8 - Maxim Air Filters Inc. plans to borrow $300,000...Ch. 8 - Digital Access Inc. needs $400,000 in funds for a...Ch. 8 - Carey Company is borrowing $200,000 for one year...Ch. 8 - Randall Corporation plans to borrow $233,000 for...Ch. 8 - Prob. 16PCh. 8 - Your company plans to borrow $13 million for 12...Ch. 8 - If you borrow $5,300 at $400 interest for one...Ch. 8 - Zerox Copying Company plans to borrow $172,000 ....Ch. 8 - Prob. 20PCh. 8 - Mr. Hugh Warner is a very cautious businessman....Ch. 8 - The Reynolds Corporation buys from its suppliers...Ch. 8 - Prob. 23PCh. 8 - Neveready Flashlights Inc. needs $340,000 to take...Ch. 8 - Harper Engine Company needs $631,000 to take a...Ch. 8 - Summit Record Company is negotiating with two...Ch. 8 - Charming Paper Company sells to the 12 accounts...Ch. 8 - The treasurer for Pittsburgh Iron Works wishes to...Ch. 8 - Prob. 2WECh. 8 - Prob. 3WE
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Similar questions
- A financial institution has assets denominated in British pound sterling of $125 million andsterling liabilities of $100 million.a) What is the FI's net exposure?b) Is the FI exposed to a dollar appreciation or depreciation?c) How can the FI use futures or forward contracts to hedge its FX rate risk? d) What is the number of futures contracts to be utilized to hedge fully the FI's currencyrisk exposure?e) If the British pound falls from $1.60/£ to $1.50/£, what will be the impact on the FI'scash position?f) If the British pound futures price falls from $1.55/£ to $1.45/£, what will be the impacton the FI's futures position.arrow_forwardWhat kind of futures hedge would be appropriate in each of the following situations? a. A bank fears that rising deposit interest rates will result in losses on fixed-rate loans? b. A bank holds a large block of floating-rate loans and market interest rates are falling? c. A projected rise in market rates of interest threatens the value of the bank's bond portfolio?arrow_forwardExplain why the forward interest rate is less than the corresponding futures interest rate calculated based on a Eurodollar futures contract.arrow_forward
- which one is correct please confirm? Q20: The main advantage of using options on futures contracts rather than the futures contracts themselves is tha interest rate risk is controlled while preserving the possibility of gains. "interest rate risk is controlled, while removing the possibility of losses" "interest rate risk is not controlled, but the possibility of gains is preserved." "interest rate risk is not controlled, but the possibility of gains is lost."arrow_forwardBy acting as the counterparty to every futures position, the exchange eliminates the A) market B) credit C) interest rate D) basis risk.arrow_forwardThe quoted rate of interest is calculated using the following formula. Quoted Rate = r* + IP + DRP +LP + MRP Given the following information what is the risk free rate (RF) of the quote of the US Treasury Bill r* = 2% IP = 3% DRP = 3% LP = 3% MRP = 4% 2% Select 5% as your answer 5% Select 8% as your answer 8% Select 15% as your answer 15%arrow_forward
- 1. Why do the prices of fixed-rate bonds fall if expectations for inflation rise? 2. What market condition will the holder of call option or put option exercise their right? 3. If treasury bonds are normally zero-coupon, how would an investor gain from investing on that security?arrow_forwardSuppose the risk-free rate goes up to 7%.What effect would higher interest rates have onthe SML and on the returns required on highrisk and low-risk securities? (2) Suppose insteadthat investors’ risk aversion increased enoughto cause the market risk premium to increase to8%. (Assume the risk-free rate remains constant.)What effect would this have on the SML and onreturns of high- and low-risk securities?arrow_forward12. What are the differences between the spot market and the forward/futures markets?arrow_forward
- M3 The terms "contango" and "backwardation" are used to describe term structures of forward/futures prices (i.e., patterns of forward/futures prices of various maturities). Please explain the meanings of these two terms and the situations in which they occur (i.e., the reasons for them). Also, consider futures prices of gold. Do you expect them to be in contango or backwardation? Why?arrow_forwardThe quoted rate of interest is calculated using the following formula. Quoted Rate = r* + IP + DRP +LP + MRP Given the following information what is the risk free rate (RF) of the quote of the US Treasury Bill r* = 2% IP = 3% MRP = 3% LP = .6% DRP = .4%arrow_forwardWhich of the following is NOT an external method of interest rate risk management? * A. Using an interest rate swap B. Using financial futures C. Using an off-balance-sheet strategy, such as a forward rate agreement D. Having fixed-interest assets financed by fixed-interest liabilities and equityarrow_forward
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