An oil producer expects to have 8,000 barrels of oil to sell in 10 months. How can the producer use forward contracts to create a perfect hedge if each forward contract is written on 1,000 oil barrels and matures in 10 months? Assume the forward price for each barrel of oil today for delivery in 10 months is $80, the spot price of a barrel of oil today is $79 dollars and the spot price of a barrel of oil in 10 months is $82 dollars. What net price does the oil producer receive for each barrel of oil in 10 months?

An oil producer expects to have 8,000 barrels of oil to sell in 10 months. How can the producer use forward contracts to create a perfect hedge if each forward contract is written on 1,000 oil barrels and matures in 10 months? Assume the forward price for each barrel of oil today for delivery in 10 months is $80, the spot price of a barrel of oil today is $79 dollars and the spot price of a barrel of oil in 10 months is $82 dollars. What net price does the oil producer receive for each barrel of oil in 10 months?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Fred enters into a futures contract to buy 10,000 pounds of cotton for $8 per pound. The initial margin is 5% of contract value, and the maintenance margin is 75% of the initial margin. What price (per pound) of cotton futures will trigger a margin call? ______. What amount would Fred’s broker have to post in response to this margin call? ______.
Suppose that the invester of GMO has an extra cash reserveof $700,000 to invest. The interest rate is 1.49% per year in the United States and 6.47% per year in Mexico. Currently, the spotexchange rate is 19.780 Pesos per dollar and the one-year forwardrate is €19.790 per dollar. The investor does not wishto bear any exchange risk. Assess how he can construct an arbitrage portfolio based on your calculation.
Suppose you invest $300,000 in a group of producing oil wells that generate a profit of $5,000 in the first month. The profit is expected to decline at a rate of half of a percent (0.005) per month. You expect to receive interest of 1.25%/month. At what minimum price should will you have to sell the field after 10 years of production?
Initial investment of 900 million with operating costs of 40 million/year. The profit in the first year is 130 million, the following year it increases with a gradient of 30 million/year until the 5th year, then remains until the 8th year, and then decreases with a gradient of 20 million/year. If the investment age is 12 years and the residual value is 300 million, evaluate the investment using the PBP and DPBP methods if the prevailing interest rate is 10%/year.
The spot price of oil is $40 per barrel and the cost of storing a barrel of oil for one year is $3.3, payable at the end of the year. The risk-free interest rate is 2.6% per annum, continuously compounded. What is an upper bound for the one-year futures price of oil? Your answer should be correct to one decimal place. Assume there are no transaction costs involved in arbitraging over-priced futures contracts.
Oil is selling at a spot price of $41.98 per barrel. Oil can be stored at a cost of $0.42 per barrel per month. The opportunity cost of capital is 0.5% per month. What is the gain or loss realized by an oil refinery that floats its exposure and purchases oil on the spot market in 2 months at a price of $42.62 per barrel, instead of hedging with a forward contract?
Jaison Ltd issues $8 million in 5-year debentures that pay interest every 6 months at a coupon rate of 10% per annum. The required market rate of return is 14% per annum. What is the issue price of the debentures (rounded to the nearest dollar)?
BioCytex SA, a French biotech company expects to receive royalty payments totaling GBP 1.25 million next month and wants to receive USD. It is interested in protecting these payments against a drop in the value of GBP It can sell 30 day GBP futures at a price of USD 1.6513 /GBP or it can buy pound put options with a strike price of USD 1.6612 /GBP at a premium of 2 cents per GBP. The spot price of the GBP is currently USD 1.6560 /GBP and the GBP is expected to trade in the rage of USD 1.6250 /GBP to USD 1.7010 /GBP BioCytex treasurer believes that the most likely price for the GBP in 30 days will be USD 1.6400 /GBP Calculate BioCytex’s profits and losses in USD for the put option within its range of expected exchange rates
You are in discussions to purchase an option on an office building with a strike price of $63 million. The building is currently valued at $60 million. The option will allow you to purchase the building either six months from today or one year from today. Six months from today, accrued rent [ayments from the building in the amount of $900,000 will be made to the owners. If you exercise the option in six months, you will receive the accrued rent payment. Otherwise, the payment will be made to the current owners. A second accrued rent payment of $900,000 will be paid one-year from today with the same payment terms. The standard deviation of the value of the building is 30 percent, and the risk-free rate is a 6 percent annual percentage rate. What is the price of the option today using six-month steps? (Hint: The value of the building in six months will be reduced by the accrued rent payment of ou do not exercise the option at the time
Generous Dynamics maintains an inventory of 15000 ounces of gold. The company is interested in protecting the inventory against daily price changes. The correlation of the daily change in the spot and futures price is. 55, the standard deviation of the daily spot price change is 20 percent, and the standard deviation of the daily change in the futures price is 37 percent. Futures contract size is 1000 ounces. How many contracts should GD buy or sell to hedge its inventory?
Suppose the initial margin on heating oil futures is $20, 200, the maintenance margin is S 16, 500 per contract, and you establish a long position of 12 contracts today, where each contract represents 27,000 gallons. Tomorrow, the contract settles down 5.07 from the previous day's price. What is the maximum price decline on the contract that you can sustain without getting a margin call?
Suppose one of your family members has inherited the rights to gas production which has recently been valued at €5.8 million. Looking at the market outlook, the value of similar gas rigs has grown by about 15% per annum with an annual standard deviation of 25%. An investor has approached to enquire from your friend about the option to buy the gas production rig for €6.2 million in the next six months. The risk-free rate of interest is 2% per annum. How much would this option be worth?

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