Patient Investor Ltd has a diversified portfolio of shares. On 1 January 2020, the shares are worth $2,850,000. On this day, the company enters into 80 futures contracts on the All Ordinaries Index futures in which it takes a sell position. The All Ordinaries Index on 1 January 2020 is 2900 and the total price of futures contract is calculated as 2900 x 80 x $12 contracts = $2,784,000. A total deposit of $150,000 is paid to the broker on the futures contract and the broker requires a minimum deposit of $150,000 and this deposit must be maintained at the same level. On 5th February 2020, Smart Investor Ltd decided to sell its portfolio of shares and to close out its futures contract and recover its deposit from the broker. On this date, the market value of the share portfolio is $2,950,000 and the All Ordinaries Index is 3000 points. Required a. Briefly explain the difference between futures contracts for hedging and futures contract for speculation. b. Provide the journal entries to record the above transactions, assuming that the above transaction is a fair value hedge. c. Describe three essential characteristics of a derivative financial instrument.
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Patient Investor Ltd has a diversified portfolio of shares. On 1 January 2020, the shares are worth $2,850,000. On this day, the company enters into 80 futures contracts on the All Ordinaries Index futures in which it takes a sell position. The All Ordinaries Index on 1 January 2020 is 2900 and the total price of futures contract is calculated as 2900 x 80 x $12 contracts = $2,784,000. A total deposit of $150,000 is paid to the broker on the futures contract and the broker requires a minimum deposit of $150,000 and this deposit must be maintained at the same level.
On 5th February 2020, Smart Investor Ltd decided to sell its portfolio of shares and to close out its futures contract and recover its deposit from the broker. On this date, the market value of the share portfolio is $2,950,000 and the All Ordinaries Index is 3000 points.
Required
a. Briefly explain the difference between futures contracts for hedging and futures contract for speculation.
b. Provide the
c. Describe three essential characteristics of a derivative financial instrument.
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