BUS 225 DAYONE LL
17th Edition
ISBN: 9781264116430
Author: BLOCK
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 8, Problem 28P
The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at
a. What will be the profit or loss on the futures contract if interest rates increase to 14.5 percent by December when the contract is closed out?
b. Explain why a profit or loss took place on the futures contracts.
c. After considering the hedging in part a, what is the net cost to the firm of the increased interest expense of
d. Indicate whether there would be a profit or loss on the futures contracts if interest rates dropped.
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The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five
Treasury futures contracts at $106,000 per contract. It is July and the contracts must be closed out in December of this year.
Long-term interest rates are currently 13.30 percent. If they increase to 14.50 percent, assume the value of the contracts will go
down by 15 percent. Also, if interest rates do increase by 1.2 percent, assume the firm will have additional interest expense on
its business loans and other commitments of $89,000. This expense, of course, will be separate from the futures contracts.
a. What will be the profit or loss on the futures contract if interest rates increase to 14.50 percent by December when the
contract is closed out?
on futures contracts
b-1. After considering the hedging, what is the net cost to the firm of the increased interest expense of $89,000?
Net cost
Clarke plans to satisfy cash needs in
nine months by selling its Treasury
bond holdings for $4 million. However,
Clarke is concerned that interest rates
might increase over the next three
months. To hedge against this
possibility, Clarke plans to sell Treasury
bond futures. Thus, Clarke sells
futures contract for a price of 99-12.
Assuming that the actual price of the
futures contract declined to 97-20,
Clarke would make a
of $___.
from closing out the futures position.
a.
b.
C.
d.
e.
-———
40; profit; $76,800
40; loss; $76,800
50; profit; $70,000
40; profit; $70,000
none of the above
Suppose that after graduation, you take a job with an Oklahoma oil company. You
boss indicates that he expects November 2020 production to be 7,000 bbl and h
would like you to manage the company's price risk.
The current cash price is $42.06/bbl and the December 2020 WTI futures price
$42.75/bbl. The contract size for WTI crude is 1,000 bbl. You hedge the entire
expected production in the futures market.
In November 2020, the cash price rises to $44.28/bbl and the December 2020
futures price rises to $44.35/bu.
Assume transaction fees of $15 per roundtrip per futures contract and a hedge r
of 1.0 when answering the questions below. Round to the nearest whole number
contracts.
Question 1
Did you first go long or short futures to initiate your hedge?
Chapter 8 Solutions
BUS 225 DAYONE LL
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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