Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 26, Problem 20PS
Summary Introduction

To compute: The interest rate met by traders in gold futures.

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You are planning to make a hedging. The standard deviation of semiannual changes in a futures price on the gold is $0.96. The standard deviation of semiannual changes of the gold price is $0.87 and the coefficient of correlation between the two changes is 0.9. What is the optimal hedge ratio for a 6-month contract? Choose correct answer:   a. The optimal hedge ratio is 0.8352 b. The optimal hedge ratio is 0.1 c. The optimal hedge ratio is 0.9931 d. The optimal hedge ratio is 0.8156
Consider a 6-months futures contract on gold. We assume no income and that $1 per ounce per 6-months to store gold, with the payment being made at the end of the period. The spot price is $1620 and risk free rate is 2% for all maturities. How can an arbitrageur earn profit is the price of 6-month gold futures is 1630$?
6. Consider a 12-months futures contract on silver. Assume no income and that it costs $X per ounce per year to store silver, with payment being made at the end of the year. The spot price is $36 per ounce and the risk free rate is 4% per annum for all maturities, based on continuous compounding. The futures price of the 12-month futures contract on silver is $39 per ounce. Assume that no arbitrage Futures-Spot parity with storage costs holds. The storage cost per ounce per year ($X) is, a. $2.88 b. $1.47 c. $1.94 d. $1.53 e. $2.15 7. Consider a FRA where S&L Inc. agrees to lend $100 mil. to a FRA dealer at a fixed rate for 1 year starting in 5 years. The contractual rate is X per annum. Assume that in 5 years the realized 1-year LIBOR is 6.5% per annum. At FRA’s settlement date the dealer pays S&L Inc., therefore it must be that X is and the settlement amount equals a. less than 6.5%; S&L’s gain divided by 1.065 b. equals to 6.5%; S&L's gain divided by 1.065 c. greater than 6.5%;…
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