PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 26, Problem 13PS
Summary Introduction
To compute: The interest rate met by traders in gold futures.
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Students have asked these similar questions
A one-year gold futures contract is selling for $1,247. Spot gold prices are $1,200 and the one-year risk-free rate is 2%.
a) According to spot-futures parity, what should be the futures price?
b) What risk-free strategy can investors use to take advantage of the futures mispricing, and what would be the profits from that strategy?
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 $26 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 $29 per ounce. Assume that no arbitrage Futures-Spot parity with storage costs holds. The storage cost per ounce per year ($X) is,
a. $2.88
b. $1.86
c. $1.94
d. $3.00
e. $2.15
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
Chapter 26 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 26 - Vocabulary check Define the following terms: a....Ch. 26 - Prob. 2PSCh. 26 - Catastrophe bonds On some catastrophe bonds,...Ch. 26 - Futures and options A gold-mining firm is...Ch. 26 - Prob. 5PSCh. 26 - Prob. 6PSCh. 26 - Futures contracts List some of the commodity...Ch. 26 - Prob. 8PSCh. 26 - Futures prices Calculate the value of a six-month...Ch. 26 - Futures prices In December 2017, six-month futures...
Ch. 26 - Prob. 11PSCh. 26 - Prob. 13PSCh. 26 - Prob. 15PSCh. 26 - Prob. 16PSCh. 26 - Prob. 17PSCh. 26 - Convenience yield In March 2018, six-month bitcoin...Ch. 26 - Prob. 19PSCh. 26 - Prob. 20PSCh. 26 - Total return swaps Is a total return swap on a...Ch. 26 - Prob. 22PSCh. 26 - Prob. 23PSCh. 26 - Hedging What is meant by delta () in the context...Ch. 26 - Hedging You own a 1 million portfolio of aerospace...Ch. 26 - Prob. 26PSCh. 26 - Prob. 27PSCh. 26 - Prob. 28PSCh. 26 - Hedging Price changes of two gold-mining stocks...Ch. 26 - Prob. 30PSCh. 26 - Prob. 31PSCh. 26 - Prob. 32PSCh. 26 - Prob. 33PSCh. 26 - You are a vice president of Rensselaer Advisers...
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Similar questions
- 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 $1620 and risk free rate is 2% for all maturities. How can an arbitrageur earn profit is the price of 6-month gold futures is 1630$?arrow_forward6. 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%;…arrow_forwardSuppose that you enter into a short futures contract to sell July silver for $17.20 per ounce. The size of the contract is 5,000 ounces. The initial margin is $4,000, and the maintenance margin is $3,000.What change in the futures price will lead to a margin call?What happens if you do not meet the margin call?arrow_forward
- Consider the following prices, volume and open interest for gold futures contracts. Contract size: 100 oz Price units: $/oz (a) Which contract reached the highest price on this trading day? What was its contract value at that price? (b) Why is the high price equal to the low price for the contract expiring in October 2022?arrow_forwardA futures contract will mature in one time step. The current return over one time-step is R = 1.01 and the underlying asset of the future contract is currently worth $27 and has up factor u = 1.1 and down factor d = 0.9. The margin account for the short side of this futures contract currently holds $16. How much will the margin account hold when the futures contract matures if the underlying asset increases in value?arrow_forwardYou are given the following data on gold markets. What is the level of arbitrage profits that can earned? • Current spot price of gold = $1,275 • Futures price for a 1-year contract = $1,300 • 1-year risk free interest rate = 3% • Assume that there are no carrying costs or yield on buying/selling gold.arrow_forward
- Suppose that the September 90-day Eurodollar futures contract has a price of $96.4 today. A firm expects to borrow $50 million for 3 months in September at the LIBOR, and intends to use the Eurodollar futures contract to hedge its future borrowing rate. a) What rate can the firm secure today by using the Eurodollar contract? b) Will the firm go long or short the Eurodollar contract? How many contracts will it buy/sell? c) Suppose that the spot 3-month LIBOR is 4% (annualized) in September. Explain how the firm met its objective of locking in a return on its future borrowing.arrow_forwardSuppose the standard deviation of monthly changes in the price of a commodity is 0.4. The standard deviation of monthly changes in futures price for a contract on commodity B (similar to commodity A) is 0.5. The correlation between the futures and commodity price is 0.88. What is the hedge ratio and the optimal number of contracts if the commodity trader wants to hedge 10000 bushels and one contract is on 100bushels? Hedge ratio should be rounded off to three decimal places and optima number of contracts should be in whole numbers.arrow_forwardUsing the quotations in Exhibit 7.3, note that the September 2016 Mexican peso futures contract has a price of $0.05481 per MXN. You believe the spot price in September will be $0.064 per MXN. Calculate your anticipated profits (or loss) measured in $ (keep one decimal), assuming you take a long position in three contracts (Note that the contract size of one MXN contract is MXN500,000 ). When you enter a positive number, it means a profit. If you enter a negative number, it means a loss. Additionally, please keep one decimal, eg., 1,500.4. There is no need to use currency symbol in this question since your balance is measured in US $.arrow_forward
- Suppose you sell seven March 2021 silver futures contracts on December 4, 2020, at the last price of the day. Use Table 25.2. a. What will your profit or loss be if silver prices turn out to be $25.01 per ounce at expiration? (Enter your answer as a positive value. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. What will your profit or loss be if silver prices are $23.13 per ounce at expiration? (Enter your answer as a positive value. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) a. b.arrow_forwardSuppose that you enter into a short futures contract to sell July silver for $27.20 per ounce. The size of the contract is 5,000 ounces. The initial margin is $4,000, and the maintenance margin is $ 3,000. What change in the futures price will lead to a margin call? What happens if you do not meet the margin call? Question 33 options: The price of silver must drop to $27.00 per ounce for there to be a margin call. If the margin call is not met, your broker closes out your position. The price of silver must rise to $27.40 per ounce for there to be a margin call. If the margin call is not met, your broker closes out your position. The price of silver must rise to $27.40 per ounce for there to be a margin call. If the margin call is not met, the position remains open until the margin declines to $0.0. The price of silver must drop to $26.20 per ounce for there to be a margin call. If the margin call is not met, your broker closes out your position. Please answer fast I give you upvote.arrow_forwardThe Mexican peso futures contract is trading at 0.07713 $/MXN. Contract size for the Mexican peso future is 500,000 pesos. You believe the spot price will be 0.08365 $/MXN at expiration. What speculative position would you enter into to profit from your beliefs? Calculate your anticipated profits assuming you take a position in three contracts. What is the size of your profit or loss if the futures price is indeed an unbiased predictor of the future spot price and this price materializes? Do problem 1 again assuming you believe the spot price will be 0.07061 $/MXN.arrow_forward
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