OER 2018 Edition

ISBN: 9781947172548

Author: OpenStax

Publisher: OpenStax College

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Textbook Question

Chapter 16.3, Problem 1CC

Distinguish between unsecured and secured short-term loans.

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Chapter 16.2, Problem 3CC

Chapter 16.3, Problem 2CC

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Mega Company believes the price of oil will increase in the coming months. Therefore, it decides to purchase call options on oil as a price-risk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil. On November 30, 20X1, Mega purchases call options for 14,000 barrels of oil at $30 per barrel at a premium of $2 per barrel with a March 1, 20X2, call date. The following is the pricing information for the term of the call: Date Spot Price Futures Price (for March 1, 20X2, delivery) November 30, 20X1 $ 30 $ 31 December 31, 20X1 31 32 March 1, 20X2 33 The information for the change in the fair value of the options follows: Date Time Value Intrinsic Value Total Value November 30, 20X1 $ 28,000 $ –0– $ 28,000 December 31, 20X1 6,000 14,000 20,000 March 1, 20X2 42,000 42,000 On March 1, 20X2, Mega sells the options at their value on that date and acquires 14,000 barrels of oil at the spot price. On June 1, 20X2, Mega sells the…

Tex Hardware sells many of its products overseas. The following are some selected transactions. Tex sold electronic subassemblies to a firm in Denmark for 120,000 Danish kroner (Dkr) on June 6, when the exchange rate was Dkr 1 = $0.1750. Collection was made on July 3 when the rate was Dkr 1 = $0.1753. On July 22, Tex sold copper fittings to a company in London for £35,000 with payment due on September 20. Also, on July 22, Tex entered into a 60-day forward contract to sell £35,000 at a forward rate of £1 = $1.630. The forward contract is not designated as a hedge. The spot rates follow: July 22 £1 = $1.580 September 20 £1 = $1.612 Tex sold storage devices to a Canadian firm for C$71,000 (Canadian dollars) on October 11, with payment due on November 10. On October 11, Tex entered into a 30-day forward contract to sell Canadian dollars at a forward rate of C$1 = $0.730. The forward contract is not designated as a hedge. The spot rates were as follows: October 11 C$1 =…