Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

3. 1) Suppose that in September 2015 a company takes a long position in a contract on May 2016 crude oil futures. It closes out

image text in transcribedimage text in transcribedimage text in transcribedimage text in transcribedimage text in transcribedimage text in transcribed

3. 1) Suppose that in September 2015 a company takes a long position in a contract on May 2016 crude oil futures. It closes out its position in March 2016. The futures price (per barrel) is $88.30 when it enters into the contract, $90.50 when it closes out its position, and $89.10 at the end of December 2015. One contract is for the delivery of 1,000 barrels. (a) What is the company's total profit? (b) When is it realized? (c) How is it taxed if it is (i) a hedger and (ii) a speculator? Assume that the company has a December 31 year-end. 2) A company has a $20 million portfolio with a beta of 1.2. It would like to use futures contracts on a stock index to hedge its risk. The index futures is currently standing at 1080, and each contract is for delivery of $250 times the index (a) How many contracts and what position that the company should enter to minimize risk? (b) What should the company do if it wants to reduce the beta of the portfolio to 0.6? 3) Explain what is meant by a perfect hedge. Does a perfect hedge always lead to a better outcome than an imperfect hedge? Explain your

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Basics Of IT Audit Purposes Processes And Practical Information

Authors: Stephen D. Gantz

1st Edition

0124171591, 978-0124171596

More Books

Students also viewed these Accounting questions

Question

The company has fair promotion/advancement policies.

Answered: 1 week ago