a.
To explain: The hedging strategy using future contracts which may consider public utility is concerned about rising costs.
Cost: It is that value of money which has been put into the production of a product. It includes all the amount of money that comes in production, research, retailing and accounting.
b.
To explain: The candy manufacturer is concerned about rising costs.
c.
To explain: The corn harvester is concerned about the lowering costs.
d.
To explain: The manufacturer of photographic film is concerned about rising costs.
e.
To explain: The natural gas producer is concerned about lowering costs.
f.
To explain: A bank has derived all the income from long-term, fixed rate residential mortgage.
g.
To explain: The decline in stock market after investing stock mutual funds in large blue chip stocks.
h.
To explain: An importer of army knives will be paying for its order in six months in S Country francs.
i.
To explain: Country U’s exporter of construction equipment decided to sell some cranes to construction firm of another country and get paid in Euros after 3 months.
Want to see the full answer?
Check out a sample textbook solutionChapter 25 Solutions
Corporate Finance
- Consider a corn producer who is planting corn to sell at his local market in Nebraska, US. Suppose the producer want to hedge his price risk using a futures contract, which has a delivery location in Chicago (which is relatively far from his local market in Nebraska). Which of the following types of risk is he likely to still exposed to? (i) Basis risk (ii) Production risk from variable weather or disease (iii) Price risk (iv) Exchange rate riskarrow_forward1. A farmer enters a contract to sell her produce at a fixed price in the future and the future market price turns out to be five times as high as the agreed fixed price. The farmer regrets entering into the futures contract. This is an example of efficient risk sharing. question: true or false? 2. Sam-Bankman Fried is the founder of crypto currency exchange FTX. He raised US$420 million from an array of major investors in October 2021. When he pitched to clients, he usually was dressed in a t-shirt. Question: What you wear is not taken into account by professional investors. True or False? 3. “Cooped up at home by stay-at-home orders during the anxious early days of the pandemic, many people used their newfound free time and stimulus checks to pick up a new hobby. Some turned to fitness or learning to play an instrument, while others found a rather unhealthy and risky new side hustle: day trading. Inspired by stupendous returns posted on Reddit’s WallStreetBets and TikTok by random…arrow_forwardInvestment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals. Annual return projections vary depending on whether the general economic conditions are improving, stable, or declining. The anticipated annual return percentages for each market segment under each economic condition are as follows: Assume that an individual investor wants to select one market segment for a new investment. A forecast shows improving to declining economic conditions with the following probabilities: improving (0.2), stable (0.5), and declining (0.3). What is the preferred market segment for the investor, and what is the expected return percentage? At a later date, a revised forecast shows a potential for an improvement in economic conditions. New probabilities are as follows: improving (0.4), stable (0.4), and declining (0.2). What is the preferred market segment for the investor based on these new probabilities? What is the expected return percentage?arrow_forward
- A farmer enters a contract to sell her produce at a fixed price in the future and the future market price turns out to be five times as the agreed fixed price. This is an example of inefficient risk sharing. true or Falsearrow_forwardQuestion: (Minimum-variance Hedging) A farmer has a crop of grapefruit juice that will be ready for harvest and sale as 150000 pounds of grapefruit juice in 3 months. He is worried about possible price changes, so he is considering hedging - a financial engineering technique that minimizes future uncertainties in the cash flow. Typically, hedging is carried out using a futures contract. However, unfortunately, there is no futures contract for grapefruit juice, but there is a futures contract for orange juice. Still, the farmer might consider using the futures contract for orange juice as a replacement for futures contract for grapefruit juice, in the hope that these two contracts are highly correlated due to the similarity of the underlying products. Currently, the spot prices are $1.20 per pound for orange juice and $1.50 per pound for grapefruit juice. The standard deviation of the prices of orange juice and grapefruit juice is about 20% per year, and the correlation coefficient…arrow_forwardIf the yield curve is upward sloping: Hint: When there is an increase in the demand for an asset, the price of the asset goes up. You expect returns from investing in such ("higher-priced") asset to be lower in the future. Conversely, when there is a decrease in the demand for an asset, the price of the asset goes down. You expect returns from investing in such ("lower-priced") asset to be higher in the future. O investors expect the short-term interest rates to fall in the future. investors often shift their investment holdings away from long-term securities. investors often short sell short-term securities. investors often shift their investment holdings away from short-term securities.arrow_forward
- Joey's bar has been the only bar in town for many years. There is a new bar opening next month. Which one of the following financial risks is Joey's bar exposed to in this scenario? a. Exchange rate risk b. Swap risk c. Price risk d. Counterparty riskarrow_forwardBarbara Millicent Roberts LLC (BMRL) is a boutique advisory firm that specialises in macro- economic forecasts for their wealthy clients. According to BMRL's analysis, the following are three possible future macro-economic environments along with state-dependent total returns for three assets, A, B and M (M is the market). ProbabilityA 0.3 0.5 0.2 B M Growth Stagnation Recession Required: Calculate the forward-looking CAPM expected return for B. 2% 15% 2% 3% 2% -10% 7% 4% -3%arrow_forwardSuppose a oil producer wants to hedge against possible price fluctuations in the market. For example, in November, he decides to enter into a short-sell position in a 2 (two) futures contracts in order to limit his exposure to a possible decline in the cash price prior to the time when he will sell his oil in the cash market. Assume that the spot price of oil is $30 and the futures price for a March futures contract is $45. What is the basis? Выберите один ответ: a. 30 b. 7.5 c. 25 d. 15 e. 45arrow_forward
- Need help. Instant upvote After collecting basis data, a canola grower feels that 775 dollars per tonne is a realistic forward cash price for the fall’s crop since November canola futures are trading at 800 dollars per tonne. To hedge, the producer purchases an at-the-money PUT for 20 dollars tonne on May 19th. While the hedge was in place, canola producers in Europe experienced crop failures and consumers in China began to import large quantities of canola produced in Canada. By October 15th, November canola futures had risen to 825 dollars per tonne. However, because of increased local production, the basis in the grower’s region weakened by 5 dollars tonne. On October 15th the grower sold his canola in the cash market. Use T-accounts to answer the following: a. What is the net selling price from hedging using the PUT? b. What price would the producer have received if he had hedged using futures?arrow_forwardassume that an individual investor wants to select one market segment for a new investment. a forecast shows stable to declining economic conditions with the following probabilities: improving (0.2), stable (0.5), and declining (0.3). what is the preferred market segment for the investor, and what is the expected return percentage?arrow_forwardCan you please show how to setup in Excel with gains/loss - Futures Hedge Lowes has a large inventory of lumber. The price of lumber has been high for the past year but the expectation is that the price will start to drop over the next few months. Lowes has 8,234,100 board feet of lumber in their inventory. The current value of the inventory is $485.65 per 1,000 board feet of lumber. They want to hedge the risk of lumber prices dropping and their inventory losing value. There are lumber futures contracts available at a quote of $482.40 per 1,000 board feet. A lumber futures contract is for 110,000 board feet. Two months later, the new inventory value is $470.00 per 1,000 board feet of lumber. The new futures price is $466.50 per 1,000 board feet of lumber.arrow_forward
- Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning