HW 3
HW 3
22. The company should short five contracts. It has the risk that offsetting investments in the hedging strategy will not experience price changes in entirely opposite directions from each other, or basis risk. It is exposed to the difference between the October futures price and the spot price of light sweet crude at the time it closes out its position in September. It is also exposed to the difference between the spot prices of light sweet crude and the oil it produces.
23. The excess of the spot over the futures at the time the hedge is closed out is $0.20 per ounce. If he hedged silver, the price paid is the futures price plus the basis. The trader would incur a loss of 60×5,000×$0.20=$60,000. If the trader hedged silver, the price received is the futures price plus the basis, or he would gain $60,000.
25 The hedge ratio should be 0.6 × 1.5 = 0.9. The company is exposed to the price of 100 million gallons fuel, and should take a position of 90 million gallons in gasoline futures. Each futures contract is for 42,000 gallons. The number of contracts required is:
90,000,000/42,000=2142
26. When the Erm is−30%, the Erp with a beta of 0.2 is
0.05 + 0.2 × (−0.30 − 0.05) = −0.02
The actual return of –10% is worse than the expected return of the market, he performed terribly
27.
A. The company should short 280 contracts
(1.2-.5)x100,000,000/1000x250=280
B. The company should take a long position in 120 contracts
(1.5-1.2)x100,000,000/1000x250=120
22. The company should short five contracts. It has the risk that offsetting investments in the hedging strategy will not experience price changes in entirely opposite directions from each other, or basis risk. It is exposed to the difference between the October futures price and the spot price of light sweet crude at the time it closes out its position in September. It is also exposed to the difference between the spot prices of light sweet crude and the oil it produces.
23. The excess of the spot over the futures at the time the hedge is closed out is $0.20 per ounce. If he hedged silver, the price paid is the futures price plus the basis. The trader would incur a loss of 60×5,000×$0.20=$60,000. If the trader hedged silver, the price received is the futures price plus the basis, or he would gain $60,000.
25 The hedge ratio should be 0.6 × 1.5 = 0.9. The company is exposed to the price of 100 million gallons fuel, and should take a position of 90 million gallons in gasoline futures. Each futures contract is for 42,000 gallons. The number of contracts required is:
90,000,000/42,000=2142
26. When the Erm is−30%, the Erp with a beta of 0.2 is
0.05 + 0.2 × (−0.30 − 0.05) = −0.02
The actual return of –10% is worse than the expected return of the market, he performed terribly
27.
A. The company should short 280 contracts
(1.2-.5)x100,000,000/1000x250=280
B. The company should take a long position in 120 contracts
(1.5-1.2)x100,000,000/1000x250=120