Phoenix Motors wants to lock in the cost of 10,000 ounces of platinum to be used in next quarter's production of catalytic converters. It buys 3-month futures contracts for 10,000 ounces at a price of $950 per ounce. a. Suppose the spot price of platinum falls to $825 in 3 months' time. Does Phoenix have a profit or loss on the futures contract? b-1. Has it locked in the cost of purchasing the platinum it needs? b-2. What is the total lock-in cost? c. If the spot price of platinum increases to $1,025 after 3 months, does Phoenix have a profit or loss on the futures contract? d. What is the total lock-in cost? Phoenix Motors has a on the futures contract equal to a. b-1. Has it locked in the cost of purchasing the platinum it needs? b-2. Total cost Phoenix Motors has a on the futures contract equal to с. d. Total cost

Phoenix Motors wants to lock in the cost of 10,000 ounces of platinum to be used in next quarter's production of catalytic converters. It buys 3-month futures contracts for 10,000 ounces at a price of $950 per ounce. a. Suppose the spot price of platinum falls to $825 in 3 months' time. Does Phoenix have a profit or loss on the futures contract? b-1. Has it locked in the cost of purchasing the platinum it needs? b-2. What is the total lock-in cost? c. If the spot price of platinum increases to $1,025 after 3 months, does Phoenix have a profit or loss on the futures contract? d. What is the total lock-in cost? Phoenix Motors has a on the futures contract equal to a. b-1. Has it locked in the cost of purchasing the platinum it needs? b-2. Total cost Phoenix Motors has a on the futures contract equal to с. d. Total cost

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
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?
Several months ago, you took a long position on a forward contract for gold. The contract's forward delivery price is $143,000, and it is set to expire in three months. The current spot price of gold is $142,000 and the annual risk-free interest rate is 5% compounded continuously. What is the current value of the forward contract that you are holding? A. SO B. + $786.14 C. - $786.14 D. $143,786
(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?
A short forward contract on an investment asset that yields 7.2% and was negotiated some time ago will expire in 10 months and has a delivery price of $68. The current spot price of the commodity is $48. The risk-free interest rate (with continuous compounding) is 3.5%. What is the value of the short forward contract
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
Suppose that your company is planning to sell 1.25 million litres of fuel in two years. Thecurrent price of fuel is £1.60 per litre. a) Suppose there is a two-year heating oil futures contract available. The futuresprice is £1.63 per litre. How many contracts would you need to fully eliminate yourrisk exposure over the next two years? How many contracts would you need ifyour optimal hedging ratio was 0.75? What position in these contracts would youtake today? Explain. b) Evaluate the outcomes of your hedging strategy if the price of fuel in two years is(1) £1.72 per litre, and (2) £1.58 per litre. In each case assume the heating oilfutures price to be equal to that of the fuel. Comment on your results.
The contract size for platinum futures is 50 troy ounces. Suppose you need 500 troy ounces of platinum and the current futures price is $2,000 per ounce. What is your dollar profit/loss if platinum sells for $2,050 a troy ounce when the futures contract expires? What's the answer?? a- Loss 1,250,000 b- Profit 1,250,000 C-Loss 2,500 d- Profit 2,500
A short forward contract on a commodity that was negotiated some time ago will expire in 9 months and has a delivery price of $58. The current spot price of the commodity is $58. The risk-free interest rate (with continuous compounding) is 4.1%. What is the value of the short forward contract?
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
Suppose the initial margin on heating oil futures is $8,400, the maintenance margin is $7,200 per contract, and you establish a long position of 10 contracts today, where each contract represents 42,000 gallons. Tomorrow, the contract settles down $0.04 from the previous day’s price. Are you subject to a margin call? Why or why not? What is the maximum price decline on the contract that you can sustain without getting a margin call?
Minetech Resources Berhad anticipates the need to purchase 80,000 bushels of soybeans in six months to use in their products. The current cash price for soybeans is RM5.50 a bushel. A six-month futures contract for soybeans can be purchased at RM5.53. Show all your working steps. i)Explain why Minetech Resources Berhad might need to purchase futures contracts to hedge their position. ii)To completely hedge their exposure, how many contracts will they need to purchase? Soybeans trade in 5,000-bushel contracts. iii)If the cash price of soybeans ends up at RM5.75 per bushel after six months, by how much will the actual cost of 80,000 bushels of soybeans have gone up? iv)After the futures contracts are closed outsold at RM5.75, what will be the gain on the futures contracts? v)Considering the answers to parts (iii) and (iv), what is their net position?

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