A refinery has 250 tons of CPO on hand. This will be held over the following three months. He aims to hedge against a drop in CPO prices, which might result in losses since his production price is linked to CPO prices. The following information is available to him. Current inventory = 250 tons Spot price = $31100 per ton Interest rate = 6% per year Annual storage cost = $ 44 per ton (4% per annum) 3-month CPO futures = $ 1126.53 per ton a. Demonstrate that the hedging approach will "lock-in" the value of his inventory in two potential CPO pricing situations in 90 days, as follows: i. Situation 1: Assume the CPO price drops by 20%. ($ 880 per ton) ii. Situation 2: Assume the CPO price increased by 20%. ($1,320 per ton)

A refinery has 250 tons of CPO on hand. This will be held over the following three months. He aims to hedge against a drop in CPO prices, which might result in losses since his production price is linked to CPO prices. The following information is available to him. Current inventory = 250 tons Spot price = $31100 per ton Interest rate = 6% per year Annual storage cost = $ 44 per ton (4% per annum) 3-month CPO futures = $ 1126.53 per ton a. Demonstrate that the hedging approach will "lock-in" the value of his inventory in two potential CPO pricing situations in 90 days, as follows: i. Situation 1: Assume the CPO price drops by 20%. ($ 880 per ton) ii. Situation 2: Assume the CPO price increased by 20%. ($1,320 per ton)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter21: Risk Management

Section: Chapter Questions

Problem 2P

See similar textbooks

Similar questions

On the London Metals Exchange, the price for copper to be delivered in one year is $5,740 a ton. (Note: Payment is made when the copper is delivered.) The risk-free interest rate is 2.00% and the expected market return is 10%. a. Suppose that you expect to produce and sell 12,100 tons of copper next year. What is the PV of this output? Assume that the sale occurs at the end of the year. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) b-1. If copper has a beta of 1.26, what is the expected price of copper at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b-2. Assume copper has a beta of 1.26. What is the certainty-equivalent end-of-year price?
Minetech Resources Berhad anticipates the need to purchase 80,000 bushels of soybeans in six months to use in their products. The current cash price for soybeans is RM5.50 a bushel. A six-month futures contract for soybeans can be purchased at RM5.53. Show all your working steps. i)Explain why Minetech Resources Berhad might need to purchase futures contracts to hedge their position. ii)To completely hedge their exposure, how many contracts will they need to purchase? Soybeans trade in 5,000-bushel contracts. iii)If the cash price of soybeans ends up at RM5.75 per bushel after six months, by how much will the actual cost of 80,000 bushels of soybeans have gone up? iv)After the futures contracts are closed outsold at RM5.75, what will be the gain on the futures contracts? v)Considering the answers to parts (iii) and (iv), what is their net position?
A firm carries a commodity inventory at a cost of $760,000 and plans to sell it in 60 days. Its market value is currently $800,000. To hedge against a decline in value of the commodity, the company sells commodity futures for delivery in 60 days at a price of $800,000. There is no margin deposit. At the company’s year-end, 30 days later, the 30-day futures price is $790,000 and the inventory market value declined to $791,000. Income effects of the inventory and the futures are reported in cost of goods sold. Thirty days after the end of the year, the market value of the inventory is $786,000. The company closes the futures contract and sells the inventory on the spot market for $786,000. What is the net income effect from the inventory and the hedge over the two years? Select one: a. $40,000 b. $34,000 c. $54,000 d. $44,000
Phoenix Motors wants to lock in the cost of 10,000 ounces of platinum to be used in next quarter's production of catalytic converters. It buys three-month futures contracts for 10,000 ounces at a price of $1,290 per ounce. Suppose the spot price of platinum falls to $1,195 in three months' time, answer the following: a-1. Calculate the profit or loss on the futures contract. Note: Enter the amount as a positive value. a-2. What is the total cost to Phoenix of buying the platinum? Suppose the spot price of platinum increases to $1,405 after three months, answer the following: b-1. Calculate the profit or loss on the futures contract. Note: Enter the amount as a positive value. b-2. What is the total cost to Phoenix of buying the platinum? a-2. Total cost b-2. Total cost
Generous Dynamics is planning on buying 3000 ounces of gold in six months. The correlation of the six-month change in the spot and futures price is. 5. The standard deviation of six-month change in spot and futures price are 27 percent and 31 percent, respectively. Futures contract size is 1000 ounces. How many contracts should GD buy or sell to hedge the future purchase? O Sell 1.3065 O Buy 1.3065 O Sell 1.7222 O Buy 1.7222 O Sell 2.6129
Consider a producer who is in the business of producing Cocoa for future sale. At the time of 0 (i.e., present time), we have S(O) = $1652, F(0) = $1675. The firm is expecting to sell the Cocoa in 2 months, while the delivery date of the futures contract is 3 months away. Assume that the price of Cocoa in two months is unpredictable, but we know that the future price in two months will be $8 higher than the spot price of Cocoa in two months (i.e., F(t) = S(t) + $8). Question 18. Without hedging, what is the firm's net profit at date t (i.e., in two months)? A) $23 B) $8 C) $31 D) $15
A farm that produces corn is looking to hedge their exposure to price fluctuations in the future. It is now May 15th and they expect their crop to be ready for harvest September 30th. You have gathered the following information: Bushels of corn they expect to produce 44,000 May 15th price per bushel $3.08 Sept 30 futures contract per bushel $3.22 Actual market price Sept 30 $3.37 Required (round to the nearest dollar): Calculate the gain or loss on the futures contract and net proceeds on the sale of the corn. Net gain or loss on future $Answer Sell the corn $Answer Net $Answer
(1) A trader signs a Forward contract on April 30 for the delivery of 500 gallons of oil on October 31. The risk-free rate is 5.00% on April 30 and the current price of oil is $30 per gallon. Each gallon of storage costs $0.03 per day.a. What will be the fair forward price on April 30?b. If the spot price of oil is $45 per gallon on July 31, what profit or loss would the trader incur if they close out (cash settle) their position?
An oil producer expects to have 8,000 barrels of oil to sell in 10 months. How can the producer use forward contracts to create a perfect hedge if each forward contract is written on 1,000 oil barrels and matures in 10 months? Assume the forward price for each barrel of oil today for delivery in 10 months is $80, the spot price of a barrel of oil today is $79 dollars and the spot price of a barrel of oil in 10 months is $82 dollars. What net price does the oil producer receive for each barrel of oil in 10 months?
Exxon Mobil has excess inventory of 60 million barrels of WTI crude oil and the company needs to sell the excess inventory. It is trying to hedge its exposure using futures contract that expires in one year. WTI price has 82% correlation with Nigerian Bonny Light price and 88% correlation with Brent blend oil price. The annualized standard deviation of daily prices of Bonny Light is 0.52 and that of WTI and Brent are 0.45 and 0.42 respectively. How should Exxon Mobil hedge the exposure There is no tailing of hedge. Short 49.280 million barrel of Bonny Light Short 49.280 million barrel of Bonny Light Short 56.574 million barrel of Brent blend none of these O Long 56.574 million barrel of Brent blend
A company expects to buy 1 million barrels of West Texas Intermediate crude oil in one year. The annualized volatility of the price of a barrel of WTI is calculated as 18%. The company chooses to hedge using futures contract on Brent Crude. The futures contract is for 100,000 barrels. The annualized volatility of the Brent futures is 20% and the correlation coefficient between WTI crude oil and Brent futures is 0.89. To hedge its exposure and minimize the resulting variance, how many futures contracts should the company buy/sell? Select one: a. Buy 8 futures contract b. Sell 8 futures contract c. Buy 9 futures contract d. Sell 9 futures contract
Generous Dynamics maintains an inventory of 15000 ounces of gold. The company is interested in protecting the inventory against daily price changes. The correlation of the daily change in the spot and futures price is. 55, the standard deviation of the daily spot price change is 20 percent, and the standard deviation of the daily change in the futures price is 37 percent. Futures contract size is 1000 ounces. How many contracts should GD buy or sell to hedge its inventory?