Tutorial 09 Solutions 2009

Tutorial 09 Solutions 2009 - EFN406 TUTORIAL NINE Tutorial...

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EFN406 1 TUTORIAL NINE Tutorial 9 Questions Futures 1. BF, page 575, Questions 1, 3, 7 and 8 2. In February 20X1 gold producer Polygold is planning the sale of 25000 ounces of gold for May 20X1. Polygold uses NYMEX gold futures contracts to hedge its price risk. Each contract is for 100 ounces of gold and the May 20X1 contract price is $900 per ounce. What sort of transaction and how many contracts should Polygold undertake to fully hedge its risk? Explain the effectiveness of the hedge under the following scenarios: (a) Scenario one – the spot price in April is $950 per ounce (b) Scenario two – the spot price in April is $850 per ounce Polycorp follows common practice and closes out its futures contract and sells the gold in the physical market. 3. It is May 20X1 and PolyAirlines is concerned about a possible sudden increase in the cost of aviation fuel on its profitability. As a short term measure it hedges its risk by using futures on oil. It uses NYMEX crude oil futures to hedge its risk. It decides that it needs to hedge 1million barrels of oil to hedge its risk. Each oil contract on the NYMEX is for 1000 barrels. The price of August Oil is $130 a barrel. What sort of contract and how many contracts should PolyAirlines undertake? Determine the effectiveness of the hedge if the spot price in August is $145 per barrel. Options 4. BF, page 620, Questions 1, 3, and 5 5. Identify the profits and losses from each of the following transactions: Assume European options and rational investors who exercise when it pays to do so. (a) You write a call option on a share at an exercise price of $40 for a premium of $6 per share. The price of the share (stock) goes to $44 at the time of maturity (ATM). (b) You buy a put option at an exercise price of $35 for $4.50 per share and the price of the stock goes to $23. (c) You write a put option at an exercise price of $35 for $4.50 per share and
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Tutorial 09 Solutions 2009 - EFN406 TUTORIAL NINE Tutorial...

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