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27. To plant and harvest 20,000 bushels of corn, Farmer Jayne incurs fixed and variable costs totaling $33,000. The current spot price of corn is $1.80 per bushel. What is the profit or loss if the spot price is $1.90 per bushel when she harvests and sells her corn? A) $3,000 gain B) $3,000 loss C) $5,000 gain D) $5,000 loss 28.A 6-month forward contract for corn exists with a price of $1.70 per bushel. If Farmer Jayne decides to hedge her 20,000 bushels of corn with the forward contract, what is her profit or loss if spot prices are $1.65 or $1.80 when she sells her crop in 6 months? Her total costs are $33,000. A) $1,000 gain or $1,000 loss B) $0 gain or $3,000 gain C) $0 loss or $3,000 loss D) $1,000 gain or $1,000 gain 29. Which of the following situations does NOT describe someone who should implement a hedge strategy? A) Mary is very nervous about losing profits if selling prices drop B) Melanie's creditors will not lend her money if her crops might lose money C) Katherine's board of directors will not tolerate losses, even if it means profits are smaller D) Dawn wants to reduce price fluctuations, but will need to conduct many transactions to FINA4319-001 Homework1 Fall 2017-Du 6 achieve her goals 30. KidCo. bought forward contracts on 20,000 bushels of corn at $1.65 per bushel. Corporate tax rates are 35.00%. Revenue is $100,000 and other costs are $60,000. Spot prices on corn are $1.75 per bushel. Calculate the after-tax net income. A) $7,000 loss B) $7,000 gain C) $4,550 loss D) $4,550 gain 31.A farmer expects to harvest 800,000 bushels of corn. To eliminate price risk, the farmer elects to short corn futures. What would cause the farmer to short only 720,000 bushels of corn? A) Basis risk B) Illiquid futures markets C) Margin requirements D) Quantity uncertain 32. Midwest Airlines is short 2 million gallons of jet fuel. Since no jet fuel contract exists, they decide to hedge with crude oil futures. One 42 barrel of crude oil is needed to produce 20 gallons of jet fuel. If one contract is for 1,000 barrels, how many crude oil contracts will they need to properly hedge their exposure? A) 2,000 contracts B) 4,200 contracts C) 20 million contracts D) 42 million contracts 33.The S&P 500 Index price is $925.28 and its annualized dividend yield is 1.40%. LIBOR is 4.2%. How many futures contracts will you need to hedge a $25 million portfolio with a beta of 0.9 for one year? A) 105 B) 120 C) 80 D) 95 34. The manager of a blue chip growth stock mutual fund is trying to fully hedge the $650 million portfolio position during the last two months of the calendar year. The current price of the S&P 500 Index futures contract is 1200. If the mutual fund has a beta of 1.24, how many contracts will be needed to hedge the fund? A) 1,083 B) 3,033 C) 242,963 D) 541,666 35.A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to reduce beta to 0.9? A. Long 192 contracts B. Short 192 contracts C. Long 48 contracts D. Short 48 contracts 36.Which of the following is true? a. The optimal hedge ratio is the slope of the best fit line when the spot price (on the yaxis) is regressed against the futures price (on the x-axis). b. The optimal hedge ratio is the slope of the best fit line when the futures price (on the y-axis) is regressed against the spot price (on the x-axis). c. The optimal hedge ratio is the slope of the best fit line when the change in the spot price (on the y-axis) is regressed against the change in the futures price (on the x-axis). d. The optimal hedge ratio is the slope of the best fit line when the change in the futures price (on the y-axis) is regressed against the change in the spot price (on the x-axis). 37.Which of the following increases basis risk? A. A large difference between the futures prices when the hedge is put in place and when it is closed out B. Dissimilarity between the underlying asset of the futures contract and the hedger's exposure C. A reduction in the time between the date when the futures contract is closed and its delivery month D. None of the above 38.Futures contracts trade with every month as a delivery month. A company is hedging the purchase of the underlying asset on June 15. Which futures contract should it use? A. The June contract B. The July contract C. The May contract D. The August contract 44. If the prepaid forward contract on a non-dividend paying stock sells for $85.25 and the annual required rate of return on the stock is 6.5%, which of the following 1 year forward contract prices does NOT represent an arbitrage opportunity? A) $ 85.25 B) $ 89.56 C) $ 90.98 D) $ 91.32 45. If the price on a 1 year forward contract is $65.92, which of the following prepaid forward contracts on a non-dividend paying stock does NOT represent an arbitrage opportunity if the annual required rate of return on the stock is 8.4%? A) $ 62.56 B) $ 60.61 C) $ 64.52 D) $ 71.70