Loose Leaf for Foundations of Financial Management Format: Loose-leaf
17th Edition
ISBN: 9781260464924
Author: BLOCK
Publisher: Mcgraw Hill Publishers
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Chapter 8, Problem 28P
The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at
a. What will be the profit or loss on the futures contract if interest rates increase to 14.5 percent by December when the contract is closed out?
b. Explain why a profit or loss took place on the futures contracts.
c. After considering the hedging in part a, what is the net cost to the firm of the increased interest expense of
d. Indicate whether there would be a profit or loss on the futures contracts if interest rates dropped.
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Students have asked these similar questions
Clarke plans to satisfy cash needs in
nine months by selling its Treasury
bond holdings for $4 million. However,
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might increase over the next three
months. To hedge against this
possibility, Clarke plans to sell Treasury
bond futures. Thus, Clarke sells
futures contract for a price of 99-12.
Assuming that the actual price of the
futures contract declined to 97-20,
Clarke would make a
of $___.
from closing out the futures position.
a.
b.
C.
d.
e.
-———
40; profit; $76,800
40; loss; $76,800
50; profit; $70,000
40; profit; $70,000
none of the above
Suppose that after graduation, you take a job with an Oklahoma oil company. You
boss indicates that he expects November 2020 production to be 7,000 bbl and h
would like you to manage the company's price risk.
The current cash price is $42.06/bbl and the December 2020 WTI futures price
$42.75/bbl. The contract size for WTI crude is 1,000 bbl. You hedge the entire
expected production in the futures market.
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futures price rises to $44.35/bu.
Assume transaction fees of $15 per roundtrip per futures contract and a hedge r
of 1.0 when answering the questions below. Round to the nearest whole number
contracts.
Question 1
Did you first go long or short futures to initiate your hedge?
Dudley Savings Bank wishes to take a position in Treasury bond futures contracts, which currently have a quote of 108 - 100. Dudley
Savings thinks interest rates will go down over the period of investment. The face value of the bond underlying the futures contract is
$100,000.
a. Should the bank go long or short on the futures contracts?
b. Given your answer to part (a), calculate the net profit to Dudley Savings Bank if the price of the futures contracts increases to 108 -
240. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2
decimal places. (e.g., 32.16))
c. Given your answer to part (a), calculate the net profit to Dudley Savings Bank if the price of the futures contracts decreases to 107 -
300. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2
decimal places. (e.g., 32.16))
a
b.
с
The futures contracts
Net profit
Net profit
Long
с
Chapter 8 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
Ch. 8 - Under what circumstances would it be advisable to...Ch. 8 - Discuss the relative use of credit between large...Ch. 8 - Prob. 3DQCh. 8 - Prob. 4DQCh. 8 - Prob. 5DQCh. 8 - Prob. 6DQCh. 8 - Prob. 7DQCh. 8 - Prob. 8DQCh. 8 - Prob. 9DQCh. 8 - Prob. 10DQ
Ch. 8 - Prob. 11DQCh. 8 - Prob. 12DQCh. 8 - Compute the cost of not taking the following cash...Ch. 8 - Regis Clothiers can borrow from its bank at 17...Ch. 8 - Simmons Corp. can borrow from its bank at 17...Ch. 8 - Your bank will lend you $4,000 for 45 days at a...Ch. 8 - Prob. 5PCh. 8 - Prob. 6PCh. 8 - Mary Ott is going to borrow $10,400 for 120 days...Ch. 8 - Prob. 8PCh. 8 - Prob. 9PCh. 8 - Prob. 10PCh. 8 - McGriff Dog Food Company normally takes 27 days to...Ch. 8 - Maxim Air Filters Inc. plans to borrow $300,000...Ch. 8 - Digital Access Inc. needs $400,000 in funds for a...Ch. 8 - Carey Company is borrowing $200,000 for one year...Ch. 8 - Randall Corporation plans to borrow $233,000 for...Ch. 8 - Prob. 16PCh. 8 - Your company plans to borrow $13 million for 12...Ch. 8 - If you borrow $5,300 at $400 interest for one...Ch. 8 - Zerox Copying Company plans to borrow $172,000 ....Ch. 8 - Prob. 20PCh. 8 - Mr. Hugh Warner is a very cautious businessman....Ch. 8 - The Reynolds Corporation buys from its suppliers...Ch. 8 - Prob. 23PCh. 8 - Neveready Flashlights Inc. needs $340,000 to take...Ch. 8 - Harper Engine Company needs $631,000 to take a...Ch. 8 - Summit Record Company is negotiating with two...Ch. 8 - Charming Paper Company sells to the 12 accounts...Ch. 8 - The treasurer for Pittsburgh Iron Works wishes to...Ch. 8 - Prob. 2WECh. 8 - Prob. 3WE
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