Corporate_Finance_9th_edition_Solutions_Manual_FINAL0

We need to find the present value of the bonds

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Unformatted text preview: evin is hurt by a decrease in the exchange rate, he should take on a short position in yen per dollar futures contracts to hedge his risk. Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 1. The initial price is $2,649 per metric ton and each contract is for 10 metric tons, so the initial contract value is: Initial contract value = ($2,649 per ton)(10 tons per contract) = $26,490 And the final contract value is: Final contract value = ($2,431 per ton)(10 tons per contract) = $24,310 You will have a loss on this futures position of: Loss on futures contract = $26,490 – 24,310 = $2,180 489 2. The price quote is $13.51 per ounce and each contract is for 5,000 ounces, so the initial contract value is: Initial contract value = ($13.51 per oz.)(5,000 oz. per contract) = $67,550 At a final price of $13.97 per ounce, the value of the position is: Final contract value = ($13.97 per oz.)(5,000 oz. per contract) = $69,850 Since this is a short position, there is a net loss of: $69,850 – 67,550 = $2,300 per contract Since you sold five contracts, the net loss is: Net loss = 5($2,300) = $11,500 At a final price of $12.63 per ounce, the value of the position is: Final contract value = ($12.63 per oz.)(5,000 oz. per contract) = $63,150 Since this is a short position, there is a net gain of $67,550 – 63,150 = $4,400 Since you sold five contracts, the net gain is: Net gain = 5($4,400) = $22,000 With a short position, you make a profit when the price falls, and incur a loss when the price rises. 3. The call options give the manager the right to purchase oil futures contracts at a futures price of $35 per barrel. The manager will exercise the option if the price rises above $35. Selling put options obligates the manager to buy oil futures contracts at a futures price of $35 per barrel. The put holder will exercise the option if the price falls below $35. The payoffs per barrel are: Oil futures price: Value of call option position: Value of put option position: Total value: $30 0 –5 –$5 $32 0 –3 –$3 $35 0 0 $0 $38 3 0 $3 $40 5 0 $5 The payoff profile is identical to that of a forward contract with a $35 strike price. 490 4. When you purchase the contracts, the initial value is: Initial value = 10(100)($951) Initial value = $951,000 At the end of the first day, the value of your account is: Day 1 account value = 10(100)($943) Day 1 account value = $943,000 So, your cash flow is: Day 1 cash flow = $943,000 – 951,000 Day 1 cash flow = –$8,000 The day 2 account value is: Day 2 account value = 10(100)($946) Day 2 account value = $946,000 So, your cash flow is: Day 2 cash flow = $946,000 – 943,000 Day 2 cash flow = $3,000 The day 3 account value is: Day 3 account value = 10(100)($953) Day 3 account value = $953,000 So, your cash flow is: Day 3 cash flow = $953,000 – 946,000 Day 3 cash flow = $7,000 The day 4 account value is: Day 4 account value = 10(100)($957) Day 4 account value = $957,000 So, your cash flow is: Day 4 cash flow = $957,000 – 953,000 Day 4 cash flow = $4,000 You total profit for the transaction is: Profit = $957,000 – 951,000 Profit = $6,000 491 5. When you purchase the contracts, your cash outflow is: Cash outflow = 25(42,000)($1.41) Cash outflow = $1,480,500 At the end of the first day, the value of your account is: Day 1 account value = 25(42,000)($1.37) Day 1 account value = $1,438,500 Remember, on a short position you gain when the price declines, and lose when the price increases. So, your cash flow is: Day 1 cash flow = $1,480,500 – 1,438,500 Day 1 cash flow = $42,000 The day 2 account value is: Day 2 account value = 25(42,000)($1.42) Day 2 account value = $1,491,000 So, your cash flow is: Day 2 cash flow = $1,438,500 – 1,491,000 Day 2 cash flow = –$52,500 The day 3 account value is: Day 3 account value = 25(42,000)($1.45) Day 3 account value = $1,522,500 So, your cash flow is: Day 3 cash flow = $1,491,000 – 1,522,500 Day 3 cash flow = –$31,500 The day 4 account value is: Day 4 account value = 25(42,000)($1.51) Day 4 account value = $1,585,500 So, your cash flow is: Day 4 cash flow = $1,522,500 – 1,585,500 Day 4 cash flow = –$63,000 You total profit for the transaction is: Profit = $1,480,500 – 1,585,500 Profit = –$105,000 492 6. The duration of a bond is the average time to payment of the bond’s cash flows, weighted by the ratio of the present value of each payment to the price of the bond. Since the bond is selling at par, the market interest rate must equal 8 percent, the annual coupon rate on the bond. The price of a bond selling at par is equal to its face value. Therefore, the price of this bond is $1,000. The relative value of each payment is the present value of the payment divided by the...
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