3e Chapter11_solutions.xlsx

# 3e Chapter11_solutions.xlsx - See the discussion found in...

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Both options and futures ccontracts are referred to as "derrivative" contracts since both types of contracts d asset on which the option or futures contract is written (i.e., the underlying asset). In addition, both option public markets and have standardized contract terms. However, the similarity between the two types of de principle difference lies in the obligations they put on the parties involved in buying and selling the contract right, but not he obligation" to exercise the option contract. Alternatively, the buyer of the futures contract futures contract. In essence the futures contract is an agreement to buy (or sell) a specified quantity of the specified today but whose contract terms will not be fulfilled until some future date. In other words, the te today but execution of the transaction does not occur until a future date. This contrasts with a spot contrac transaction are agreed upon and the transaction is completed simultaneously.
derive their value from the value of the ns and futures contracts are traded on errivative contracts ends here. The ts. With an option the buyer has "the t is obligated to fulfill the terms of the e underlying asset based on terms erms of the future transaction are set ct in which contract terms for the

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Given: MCF One thousand cubic feet Solution = Value given in prob Forward = Formula/Calculatio Year MCF Price/MCF = Qualitative analysi 1 100000 4.5 = Goal Seek or Solve 2 100000 4.75 = Crystal Ball Input 3 100000 5.3 = Crystal Ball Output 4 100000 6 5 100000 6.5 Solution: Forward Projected Year MCF Price/MCF Revenues 1 100,000 \$ 4.50 450000 2 100,000 4.75 475000 3 100,000 5.30 530000 4 100,000 6.00 600000 5 100,000 6.50 650000
n Legend blem on/Analysis required is or Short answer required er cell t

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1. Patterson Farms can "sell it's production today for a price agreed upon now and for delivery at a future d "in the future" using a futures contract Patterson fixes the priceper buschel it will receive in the future from 2. However, since the actual yield cannot be known in advance, it is impossible to completely hedge the rev if Patterson enters into a futures contract to sell 50,000 bushels of corn and only produces 40,000 bushels, t an added 10,000 bushels. Similarly if the firm uses a futures contract to sell 50,000 bushels but produces 60 additional 10,000 bushels at the current market price at the harvest.
date using a futures contract. By selling m the sale of it's corn harvest. venue risk of the corn crop. For example, the firm will have to settle the contract for 0,000 then it will have to sell the

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PROBLEM 11-5 Given Available gas (MCF) 50,000,000 Price of Gas (today) \$ 14.03 per MCF Gas Price Next Year High \$ 18.16 Low \$ 12.17 Forward price for next year \$ 14.87 Development cost per MCF \$ 4.00 Debt (on the property) \$ 450,000,000 Interest rate on debt 10% Debt maturity 1 year Asking price for Equity \$ 50,000,000 Risk free rate of interest 6.0% Income tax rate 0.0%
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