14. Futures prices (S27-4) Consider the commodities and financial assets listed in Table 27.5.

The risk-free interest rate is 6% a year, and the term structure is flat.

Asset Spot Price Comments Magnoosium $2,800 per ton Net convenience yield = 4% per year Oat bran $0.44 per bushel Net convenience yield = 0.5% per month Biotech stock index $140.2 Dividend = 0 Allen Wrench Co. common stock $58.00 Cash dividend = $2.40 per year 5-year Treasury note $108.93 8% coupon Westonian ruple 3.1 ruples = $1 12% interest rate in ruples

⟩ TABLE 27.5 Spot prices for selected commodities and financial assets. See Problem 14.

a. Calculate the six-month futures price for each case.

b. Explain how a magnoosium producer would use a futures market to lock in the selling price of a planned shipment of 1,000 tons of magnoosium six months from now.

c. Suppose the producer takes the actions recommended in your answer to part (b), but after one month magnoosium prices have fallen to $2,200. What happens? Will the producer have to undertake additional futures market trades to restore its hedged position?

d. Does the biotech index futures price provide useful information about the expected future performance of biotech stocks?

e. Suppose Allen Wrench stock falls suddenly by $10 per share. Investors are confident that the cash dividend will not be reduced. What happens to the futures price?

f. Suppose interest rates suddenly fall to 4%. The term structure remains flat. What happens to the six-month futures price on the five-year Treasury note? What happens to a trader who shorted 100 notes at the futures price calculated in part (a)?

g. An importer must make a payment of 1 million ruples three months from now. Explain two strategies the importer could use to hedge against unfavorable shifts in the ruple–dollar exchange rate.