PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
expand_more
expand_more
format_list_bulleted
Question
Chapter 26, Problem 16PS
a.
Summary Introduction
To discuss: The impact of this on the net convenience yield and .association between spot and future prices.
b.
Summary Introduction
To discuss: The impact on net convenience yield and heating oil’s spot and futures prices.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
14. Pear, Inc. is a manufacturer that is heavily dependent on plastic parts shipped from Malaysia.
Pear wants to hedge its exposure to plastic price shocks over the next 6 months. Futures contracts,
however, are not readily available for plastic. After some research, Pear identifies futures contracts
on other commodities whose prices are closely correlated to plastic prices. Futures on Commodity A
have a correlation of 0.70 with the price of plastic, and futures on Commodity B have a correlation
of 0.80. The price of plastic Futures on both Commodity A and Commodity B are available with
6-month and 9-month expiration. Ignoring liquidity considerations, which contract would be the
best to minimize basis risk?
14
(a) Futures on Commodity A with 6 months to expiration
(b) Futures on Commodity B with 6 months to expiration
(c) Futures on Commodity A with 9 months to expiration
(d) Futures on Commodity B with 9 months to expiration
You believe that the VIX trades in regimes where its average level is significantly different. You define four regimes from 2004 through 2021 June 2008 through October 2011 (financial crisis): February 2020 through March 2021 (the COVID-19 crisin); the 12-month transition periods before and after the financial crisis and the current transition period after the COVID-19 crisis and the remaining periods of low volatility. In order to test your hypothesis, you examine month-end values of the VIX from January 2004 through October 2021 (214 observations) and conduct the following regression:
Dependent variable Y Month-end value of VIX Dummy variable X1 Financial Crisis 1 if between June 2008 through Oct 2011,0
if not Dummy variable X2.COVID-19 crisis: 1 if between Feb 2020 through March 2021, Dummy variable X2 Transition period 1 if in 12 months before or after the financial crisis orthe current period since the COVID-19 crisis (June 2007 May 2008, Nov 2011-Oct 2012 or April 2021-Oct…
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
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...
Knowledge Booster
Similar questions
- Ih the year 2008, the United States was just entering a major recession. You are researching how various consumer prices changed in the ten-year period starting in 2008 and ending in 2018. Suppose you have located the following chart listing various consumer purchases and their costs in 2008 and 2018, as well as the percentage change based on the 2008 prices. Unfortunately, portions of the chart are missing. Fill in the blank spaces to complete the chart for your story. Round percent answers to the nearest tenth of a percent. Round dollar amount answers to the nearest whole dollar. Consumer Purchase 2008 Percent Change 2018 Single-Family Home median resale price (for a particular month) $237,300 $290,700 % A particular compact car MSRP for the manual transmission $20,300 $4 13.2% Pair of Jeans easy fit, stonewashed $44.40 $59.95 A particular fast food hamburger Average price at company-owned restaurants $2.97 $3.93 %24arrow_forwardIn the year 2008, the United States was just entering a major recession. You are researching how various consumer prices changed in the ten-year period starting in 2008 and ending in 2018. Suppose you have located the following chart listing various consumer purchases and their costs in 2008 and 2018, as well as the percentage change based on the 2008 prices. Unfortunately, portions of the chart are missing Fill in the blank spaces to complete the chart for your story. Round percent answers to the nearest tenth of a percent. Round dollar amount answers to the nearest whole dollar Consumer Purchase Single-Family Home median resale price (for a particular month) A particular compact car MSRP for the manual transmission Pair of Jeans easy fit, stonewashed A particular fast food hamburger Average price at company-owned restaurants 2008 $237,300 $20,400 $ $44.80 $2.97 2018 $290,700 $59.95 $3.94 Percent Change 13.2% 1 %arrow_forwardAutomobile Industry recently in Pakistan is effected badly due to unfavorable economic performance in year 2019-2020. Government T-bill rate average in this year is 8.3 %. Expected return of the market portfolio for this year is calculated as 19 %. Calculate the Expected stock return of each auto company and draw financial suggestion for this Auto sector based on the answer. Stocks Honda Pak Suzuki Toyota FAW KIA Pearl Beta 1.3 0.7 1.8 1.5 1 1.4arrow_forward
- A grain farmer has 200,000 bushels of corn in storage as of November 1st. For various reasons this grain farmer does not wish to sell until next spring. This farmer is also concerned about the price of grain dropping between now and next spring. The basis next spring is estimated to be $.40 under. On November 1st May futures are $4.25. 1. What is the estimated price if this person hedges? 2. If this person hedges would they buy or sell contracts? 3. How many contracts would be needed to hedge the entire crop? Assume on November 1st this farmer hedges the entire crop using May futures. Next spring the CBOT contracts are offset at $4.05 and the actual corn is sold for $3.65 per bushel at the local elevator. 4 What was the actual outcome? s. What would the outcome have been without the hedge?arrow_forwardPls help with below homework. 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_forwarda) News that U.S. auto safety regulators are investigating Tesla's Autopilot System caused a decrease in the tech-heavy Nasdaq-100 index last week1. Suppose a speculator thinks that the investigation won’t find any damning evidence against Tesla, and they predict the Nasdaq-100 index will increase in the future. Should the trader go long or short on a Nasdaq-100 futures contract? b) Following the same scenario from (a), the speculator decides to execute a trade of one E-Mini Nasdaq-100 futures contract with March 2022 expiry (contract size $20). Suppose the speculator opens their position at an index value of 14,900, and four weeks later closes their position at an index value of 15,400. Calculate the speculators profit/loss assuming they follow your advice in (a) (ignore brokerage fees).arrow_forward
- Kamada: UIA Japan (B). Takeshi Kamada, Credit Suisse (Tokyo), observes that the */$ spot rate has been holding steady, and that both dollar and yen interest rates have remained relatively fixed over the past week. Takeshi wonders if he should try an uncovered interest arbitrage (UIA) and thereby save the cost of forward cover. Many of Takeshi's research associates and their computer models are predicting the spot rate to remain close to ¥118.00/$ for the coming 180 days. Using the data below, analyze the UIA potential. Arbitrage funds available Spot rate (*/S) 180-day forward rate (\/$) Expected spot rate in 180 days (\/S) U.S. dollar annual interest rate Japanese yen annual interest rate $ 5,000,000 118.54 117.76 118.00 4.796 % 3.404 % C and invest in the The UIA profit potential is %, which tells Takeshi Kamada that he should borrow to three decimal places and select from the drop-down menus.) If his expectations about the future spot rate, the one in effect in 180 days. prove…arrow_forward(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?arrow_forwardJohn Ayena, a trainee at an investment banking firm, is trying to get an idea of what real rate of return investors are expecting in today’s marketplace. He has looked up the rate paid on 3-month U.S. Treasury bills and found it to be 5.5%. He has decided to use the rate of change in the Consumer Price Index as a proxy for the inflationary expectations of investors. That annualized rate now stands at 3%. On the basis of the information that John has collected, what estimate can he make of the real rate of return?arrow_forward
- Bak Assume that Richelle Corp imported goods from New York and needs 145,000 New York dollars 180 days from now. It is trying to determine whether to hedge its position. Richelle has developed the following probability distribution for the New York dollar Possible dollar value in 180 days HAE $.45 $0.40 $0.43 $0.51 $067 $0.81 $16.095 and 75% $4653 and 4.5% $3,789 and -89% Probability $3.356 and 35% 5% 10% 30% The 180-day forward rate of New York dollar is $0.63, and the spot rate is $0.59. Determine the expected additional cost of hedging. What is the probability that hedging will be more costly to the firm that not hedging? 30% 20% 5%arrow_forwardWhat would be concluded about the South African Mobile Phone sector between 2008 and 2011? A. The market was very depressed between the period 2008-2011 as cellular stocks remained below2008 prices through the period to 2011.B. The market was solid and prices were rising between 2008 and 2011C. Prices fell steadily but investors remained hopeful that the market was going to rebound in the nearto medium termD. The market crashed and plateaued between 2008 and 2011arrow_forwardWhy did Estee Lauder greatly increase the payout ratio in 2020 when the pandemic broke out. Why Did it decrease its payout ratio dramatically in 2021arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT