In is February. The operation manager of a new mining company reviews its platinum production plans. The production forecasts suggest that the company will have 20,000 ounces of newly mined and refined platinum available for sale the following June. The manager considers the current price of the July platinum futures contract at $1,132.80 per ounce favourable, given the company's total production costs, including interest and depreciation, of $980 an ounce. As a result, on January 28, the mining financial manager decides to lock in a profit by hedging his anticipated production using the July platinum futures contract at S1,132.80 per ounce. On January 28, the spot price is $1,121.31 per ounce. The contract size is 50 troy ounces on the CME Group. (b) Indicate whether the financial manager should use a long or short forward contract to hedge the risk exposure. How many contracts are needed for a full hedge? (c) On January 28, the company trades July futures contracts at $1,132.80 per ounce. The initial margin deposit for CME Group is $8,100 per contract and the maintenance margin is $6,000. The next day, the July platinum futures price closes at $1136.80 per ounce. What is the balance in the margin account? Would the company get a margin call? Why? What if the July platinum futures price closes at $1127.50 per ounce? (d) What price change would lead to a margin call from the initial futures price of $809.80 per ounce (up or down)? (e) On June 15, the company sells platinum at $1210.25 per ounce locally and it offsets the futures positions. Suppose that on June 15, the futures price is trading at $1125.50 per ounce. What is the company's net (effective) selling price per ounce for platinum? (f) What would be the company's net selling price per ounce for platinum if the financial manager hedged only 75% of the forecasted production? What is the total gain/loss from the futures position(s)? Any regrets from hedging? Why?
In is February. The operation manager of a new mining company reviews its platinum production plans. The production forecasts suggest that the company will have 20,000 ounces of newly mined and refined platinum available for sale the following June. The manager considers the current price of the July platinum futures contract at $1,132.80 per ounce favourable, given the company's total production costs, including interest and depreciation, of $980 an ounce. As a result, on January 28, the mining financial manager decides to lock in a profit by hedging his anticipated production using the July platinum futures contract at S1,132.80 per ounce. On January 28, the spot price is $1,121.31 per ounce. The contract size is 50 troy ounces on the CME Group. (b) Indicate whether the financial manager should use a long or short forward contract to hedge the risk exposure. How many contracts are needed for a full hedge? (c) On January 28, the company trades July futures contracts at $1,132.80 per ounce. The initial margin deposit for CME Group is $8,100 per contract and the maintenance margin is $6,000. The next day, the July platinum futures price closes at $1136.80 per ounce. What is the balance in the margin account? Would the company get a margin call? Why? What if the July platinum futures price closes at $1127.50 per ounce? (d) What price change would lead to a margin call from the initial futures price of $809.80 per ounce (up or down)? (e) On June 15, the company sells platinum at $1210.25 per ounce locally and it offsets the futures positions. Suppose that on June 15, the futures price is trading at $1125.50 per ounce. What is the company's net (effective) selling price per ounce for platinum? (f) What would be the company's net selling price per ounce for platinum if the financial manager hedged only 75% of the forecasted production? What is the total gain/loss from the futures position(s)? Any regrets from hedging? Why?
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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Transcribed Image Text:In is February. The operation manager of a new mining company reviews its platinum
production plans. The production forecasts suggest that the company will have 20,000 ounces of newly mined
and refined platinum available for sale the following June. The manager considers the current price of the July
platinum futures contract at S1,132.80 per ounce favourable, given the company's total production costs,
including interest and depreciation, of $980 an ounce. As a result, on January 28, the mining financial manager
decides to lock in a profit by hedging his anticipated production using the July platinum futures contract at
S1,132.80 per ounce. On January 28, the spot price is $1,121.31 per ounce. The contract size is 50 troy ounces
on the CME Group.
(b) Indicate whether the financial manager should use a long or short forward contract to hedge the risk
exposure. How many contracts are needed for a full hedge?
(c) On January 28, the company trades July futures contracts at $1,132.80 per ounce. The initial margin
deposit for CME Group is $8,100 per contract and the maintenance margin is $6,000. The next day, the
July platinum futures price closes at $1136.80 per ounce. What is the balance in the margin account?
Would the company get a margin call? Why? What if the July platinum futures price closes at $1127.50
per ounce?
(d) What price change would lead to a margin call from the initial futures price of $809.80 per ounce (up or
down)?
(e) On June 15, the company sells platinum at $1210.25 per ounce locally and it offsets the futures
positions. Suppose that on June 15, the futures price is trading at $1125.50 per ounce. What is the
company's net (effective) selling price per ounce for platinum?
(f) What would be the company's net selling price per ounce for platinum if the financial manager hedged
only 75% of the forecasted production? What is the total gain/loss from the futures position(s)? Any
regrets from hedging? Why?
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