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
expand_more
expand_more
format_list_bulleted
Question
Chapter 26, Problem 3PS
Summary Introduction
To discuss: Whether person X ask to pay money or she offers to pay.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
You bought a futures contract for $2.60 per bushel and the contract ended at $2.70 after several days of trading with the following close prices each day: $2.52, $2.57, $2.62, $2.68, and $2.70. What would the mark to market sequence be?
A.
-.08, .05, .05, .06, .02
B.
.08, -.05, -.05, -.06, -.02
C.
.08, .03, -.02, -.06, -.10
D.
-.08, -.03, .02, .06, .10
E.
.10, .06, .02, -.03, -.08
Today on August 18 Tesla Inc. stock (TSLA) trades at a spot price of $220 per share. A trader decides
to buy a European call option contract (= 100 call options) on the stock with a strike price of $220
and maturity September 15 (i.e., in one month). The price of the European call option contract is
$12 per option.
(i) Under what circumstances does the trader make a gain on September 15?
(ii) What is the maximum possible gain for the trader?
(iii) What is the maximum possible loss for the trader?
Provide short answers for (i). (ii), (iii).
Today is May 1. Your firm purchased $15,000,000 face value of 180 day commercial paper today for a price of $14,550,000. You will need to liquidate the position in 120 days and you believe interest rates may move against you in the meantime and you decide to use euro$ futures to hedge the position.
a) How many futures contracts should you use to fully hedge and should you buy or sell the futures contracts today if the September euro$ futures quote is at 98.55 and the December euro$ futures quote is at 97.35? Should you use the September or the December contract?
b) One hundred and twenty days later, at the end of August the commercial paper is priced at $14,800,000 and the futures price quote for the September euro$ futures quote is at 98.95 and the December euro$ futures quote is at 98.25. What is the total dollar gain or loss on your futures position? What is the percentage interest rate earned on the commercial paper investment expressed as an effective annual rate or EAR including…
Chapter 26 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 26 - Vocabulary check Define the following terms: a....Ch. 26 - Prob. 2PSCh. 26 - Prob. 3PSCh. 26 - Futures prices Calculate the value of a six-month...Ch. 26 - Prob. 5PSCh. 26 - Prob. 6PSCh. 26 - Prob. 7PSCh. 26 - Prob. 8PSCh. 26 - Prob. 9PSCh. 26 - Prob. 10PS
Ch. 26 - Hedging You own a 1 million portfolio of aerospace...Ch. 26 - Prob. 12PSCh. 26 - Prob. 13PSCh. 26 - Catastrophe bonds On some catastrophe bonds,...Ch. 26 - Futures contracts List some of the commodity...Ch. 26 - Prob. 16PSCh. 26 - Prob. 17PSCh. 26 - Prob. 18PSCh. 26 - Prob. 20PSCh. 26 - Prob. 21PSCh. 26 - Prob. 22PSCh. 26 - Hedging What is meant by delta () in the context...Ch. 26 - Futures and options A gold-mining firm is...Ch. 26 - Prob. 25PSCh. 26 - Hedging Price changes of two gold-mining stocks...Ch. 26 - Risk management Petrochemical Parfum (PP) is...Ch. 26 - Total return swaps Is a total return swap on a...Ch. 26 - Prob. 30PSCh. 26 - Prob. 31PSCh. 26 - Prob. 32PSCh. 26 - You are a vice president of Rensselaer Advisers...
Knowledge Booster
Similar questions
- Show work please!arrow_forwardThis morning (Day 0) you take a short position in a pound futures contract that matures in 3 days (Day 3). The future price is $1.9750 today. The contract size is £62,500 and its initial performance bond and maintenance bond are $2,430 and $1,830, respectively. a. (b) Assuming that the daily settlement prices are indicated below, how would the daily change in settlement future prices affect your account? Show the daily gain/loss and account balance. Day 0 1 2 3 Settlement 1.9750 1.9700 1.9815 1.9907 Total Gain/Loss Account Balance b. During this period, did you receive a margin call? If you did, on what day? c. At the end of Day 3, how much in total did you make/lose on this futures contract?arrow_forwardYou work in a derivatives section in an investment bank. In August, a customer who holds Texa stock priced at $150 is worried that the stock will fall in price by the end of the year. Assuming the stock does not pay a dividend, can you sell the customer an option that insures that if the stock price falls below $145, their stock plus option payoff will never fall below $145? Explain.arrow_forward
- 1. Suppose trader A sells a E-miniS&P 500 indexDecember 2021 expiry (ESZ1)futures contract to trader Bon May 7 , 2021. Suppose the price declines and trader A liquidates their position by buying a futures contract fivedayslateron May12, 2021. Does trader A make a profit? Does trader B have to make a loss? Explain your answer. 2. Consider a large Australian cotton farmer who has just planted her crop. Once grown, she plans to export her production to China: Suppose the Australian cotton farmer goes short on a cotton no. 2 futures contract on the ICE exchange. Go to theice.com and look up the contract. What is the contract size? Is the contract settled with physical delivery or cashsettlement?arrow_forwardOn Tuesday morning, an investor takes a long position in GBP futures contract with a size of GBP 70,500 that matures on Thursday afternoon. Using the below table, what will be the investor's net profit (loss)? Time Close Price Tuesday 1 GBP = USD1.75 Morning (T) Tuesday Close1 GBP = USD1.76 (T) Wednesday 1 GBP = USD1.80 Close (T+1) Thursday 1 GBP = USD1.78 Close (T+2) O a. USD 2,820 O b. USD 705 OC USD 2,115 O d.- USD 1,410arrow_forwardYou have a long position in one soybean futures contract. The initial margin was $3,250 and the maintenance margin is $1,750. At the close of trading yesterday, the futures price was $8.03 per bushel and the balance in your margin account was $4,500. Today, the settlement price for soybean futures is $7.33. Will you receive a margin call and what deposit will you be required to make? $1,750 O no margin call; $0. O $2,250 $2,750arrow_forward
- You placed $120,000 in your future trading account have just bought your first HSI June 2023 futures contract today @ 19,652, at market close the HSI June 2023 future closed at 19,534. Currently the initial margin for HSI is $101,944, the maintenance margin is $81,555. HSI futures is $50 per index point. What is you margin account balance as of market closed today? Please write out the detailed calculation stepsarrow_forwardAs a financial analyst at Deutsche Bank, NY, you are helping your client with futures hedging. Your client enters into a long position in futures contract to buy 5,000 bushels of wheat for $6.50 per bushel. The initial margin is $3,000 and the maintenance margin is $2,000. Your client will be allowed to withdraw any balance in the margin account in excess of the initial margin and the company will get a margin call if the balance is going below the maintenance margin. a. Will the trader get a margin call if the futures price goes to $6.14? (sample answer: Yes or No) b. What will be the price that will trigger a margin call of $2,500? C. What will be the price that will allow you to withdraw just $2,500 from the margin account? (sample answer $4.50) (sample answer:$4.50)arrow_forwardLook at the futures listings for the corn contract in Table 2.7.Suppose you buy one contract for September 2019 delivery. If the contract closes in September at a level of 4.36, what will your profit be? (Round your answer to 2 decimal places.)arrow_forward
- Suppose that on Monday, 7 July, you assume a long position in one December British pound futures contract at the futures price of $1.10/£. The initial margin is $2,000, and the maintenance margin is $1,500. The contract size is £125,000. Assume you do not withdraw excess money from your margin balance. All margin requirements are met with cash. The settlement prices for Monday and the next two days are shown in the following: Monday: $1.10 Tuesday: $1.15 Wednesday: $1.07 What is the balance in your margin account at the end of Wednesday? The correct answer is B. 1500 - Could you please explain why 1500 is the correct answer. a. $1,750 b. $1,500 c. $2,000 d. $-$1,000 e. $750arrow_forwardYou are a futures trader on Lean Hog at Kantar, New York. You have the following information on Lean Hog. The standard deviation of monthly changes in the spot price of Lean Hog Futures is (in cents per pound) 5. The standard deviation of monthly changes in the futures price of Lean Hog Futures the closest contract is 8. The correlation between the futures price changes and the spot price changes is 0.8. It is now December 17, 2019. Your client, a pork producer, is committed to purchasing 400,000 pounds of lean hog on January 15. The producer wants to use February Lean Hog futures contracts to hedge its risk. Each contract is for the delivery of 40,000 pounds of cattle. a. What is the optimal hedge ratio? (sample answer: 0.45 or 45%) b. Should the pork producer take a long or short hedge? (sample answer: short or long) c. How many contracts of lean hog futures does your client need to take to hedge the risk? (sample answer: 6 contracts)arrow_forwardAssume that today the euro futures contracts with a September 15th delivery date are priced at $1.3680/€ . Suppose that you sold 15 contracts of the euro futures today. If, by September 15th the spot rate is $1.3260/€ , your total profit/loss on your position is (the euro futures contract size is €125,000). $78,750 loss $78,750 gain €78,750 loss €5,250 loss None of the abovarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you