Homework Help is Here – Start Your Trial Now!
Business
Finance
b-1. After considering the hedging, what is the net cost to the firm of the increased interest expense of $89,000? Net cost b-2. What percent of this $89,000 cost did the treasurer effectively hedge away? (Input your answer as a percent rounded to 2 decimal places.)

b-1. After considering the hedging, what is the net cost to the firm of the increased interest expense of $89,000? Net cost b-2. What percent of this $89,000 cost did the treasurer effectively hedge away? (Input your answer as a percent rounded to 2 decimal places.)

Essentials Of Investments
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
See similar textbooks
icon
Related questions
Question
b-1. After considering the hedging, what is the net cost to the firm of the increased interest expense of $89,000? Net cost b-2. What percent of this $89,000 cost did the treasurer effectively hedge away? (Input your answer as a percent rounded to 2 decimal places.) Percentage hedged away c. Indicate whether there would be a profit or loss on the futures contracts if interest rates went down. Loss % Profit
Transcribed Image Text:b-1. After considering the hedging, what is the net cost to the firm of the increased interest expense of $89,000? Net cost b-2. What percent of this $89,000 cost did the treasurer effectively hedge away? (Input your answer as a percent rounded to 2 decimal places.) Percentage hedged away c. Indicate whether there would be a profit or loss on the futures contracts if interest rates went down. Loss % Profit
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
Transcribed Image Text: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
Expert Solution
steps

Step by step

Solved in 5 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Balance Sheet Regulation
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS