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

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

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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On the London Metals Exchange, the price for copper to be delivered in one year is $5,500 a ton. (Note: Payment is made when the copper is delivered.) The risk-free interest rate is 2% and the expected market return is 8%. a. Suppose that you expect to produce and sell 10,000 tons of copper next year. What is the PV of this output? Assume that the sale occurs at the end of the year. Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. b-1. If copper has a beta of 1.2, what is the expected price of copper at the end of the year? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b-2. Assume copper has a beta of 1.2. What is the certainty-equivalent end-of-year price? X Answer is complete but not entirely correct. 53.92 million per ton a. Present value b-1. Expected price b-2. Certainty-equivalent price $ $ IS 6,383.38 5,937 per ton
This question will compare two different arbitrage situations. Recall that arbitrage should equalize rates of return. We want to explore what this implies about equalizing prices. In the first situation, two assets, A and B, will each make a single guaranteed payment of $100 in 1 year. But asset A has a current price of $80 while asset B has a current price of $90.a. Which asset has the higher expected rate of return at current prices? Given their rates of return, which asset should investors be buying and which asset should they be selling?b. Assume that arbitrage continues until A and B have the same expected rate of return. When arbitrage ceases, will A and B have the same price?Next, consider another pair of assets, C and D. Asset C will make a single payment of $150 in one year while D will make a single payment of $200 in one year. Assume that the current price of C is $120 and that the current price of D is $180.c. Which asset has the higher expected rate of return at current…
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?
2. Consider a European put with an exercise (strike) price of 5.00 and with 6 months to maturity. The underlying asset has a volatility of 30% and the riskless rate is 5% per year. Estimate a numerical upper bound for the asset price S(t) (to nearest 0.01) at which an European put will sell below its intrinsic value of max(E – S(t), 0). (Compute P(S, t) and E – S(t) for some values of S(t) below the strike price. Compute P(S, t) to at least 3 decimal places.)
If the risk-free rate is 4%, market risk premium is 6% and you are interested in a cocoa futures contract with beta of cocoa being -0.291, What is the required annual rate of return on the cocoa contract ? You plan to hold the contract for 3 months only, and take its delivery. At that time you expect the spot price of cocoa will be $900 per ton. What is the present value of this three-month deferred claim ? What should be the proper price of this contract ?
A rice importer is going to sell rice in one year. In order to lock in a fixed selling price, the importer buys a put option and sells a call option on each ton of rice, each with the same strike price and the same one-year expiration date. The current price of rice is 360 per ton, and the net premium that the importer pays now to lock in the future price is 12 per ton. The continuously compounded risk-free interest rate is 6%. Calculate the fixed selling price per ton of rice one year from now.
Your firm purchased an equipment from a British company. Total cost was £50,000 (in 30 days). The pound is expected to appreciate against $ substantially in 30 days. Let's suppose it would be $1.6/£ in 30 days. Questions: 1. You decide to use option to hedge against the exchange rate risk. What would be your maximum (or minimum) strike price if it is possible for you to find that strike price? 2. After you bought the option, the spot exchange rate in 30 days turns out to be lower than the strike price. What would you do and what do you need to do?
A farmer shorts cocoa futures for 500 tons at RM6,000 per ton. The exchange requires him to post RM300,000 as the initial margin, and sets the maintenance margin at RM250,000. At what price change the margin call level will be triggered? What is the margin call price?
Suppose a European call option to buy 1 euro for 1.40 CAD costs 0.08 CAD. The option maturity is in two months and the forward exchange rate for the same maturity is 1.50 CAD per euro. What arbitrage opportunity exists? Explain how you can exploit this opportunity and how much the profit is. (Ignore the time value of money)
The following is the spot and forward rates of dollar against Euro. Spot 30-day forward Euro/$ 0.85 0.90 You sign a contract for selling John Deere with the amount of 1 billion euros that will be delivered in 30days. You expect the 30day later the spot rates of dollar to be 0.75 with 50% chance and 0.95 with 50%. What is the expected dollar amount if no forward has been used? As a risk-neutral person, is it a good idea to use the forward?
Suppose for simplicity that the price of frozen concentrated orange juice is currently at $1000 per 10-pound contract and an investor who holds 10 pounds of FCOJ wishes to temporarily hedge her exposure to market risk. Assume that the cost of storing 10 pounds of FCOJ comes to $20 per year, and, for simplicity, all costs are paid at year-end and the risk-free interest rate is 1%. (a) Calculate the appropriate Futures price for a 10-pound FCOJ contract using Spot-Futures Parity. (b) Assume that the futures price for year-end delivery of the FCOJ contract is $1,010 (the parity is violated). Show how an investor can make arbitrage profits.
An Indian exporter has entered into a sale transaction of pulses for $20,000 for which the payment will be given after two months. If the exporter expects the USD price to fall within two months, calculate his profit if he hedges the risk through forex option as under: USD/INR spot buying rate is 82.50 USD/INR Future 2 months 84.00 Spot rate afterwo months is 83.00

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