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ans-odd-problems-ch25

ans-odd-problems-ch25 - CHAPTER 25 DERIVATIVES AND HEDGING...

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CHAPTER 25 DERIVATIVES AND HEDGING RISK Solutions to Odd-Numbered 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 \$1,435 per metric ton and each contract is for 10 metric tons, so the initial contract value is: Initial contract value = (\$1,435 per ton)(10 tons per contract) = \$14,350 And the final contract value is: Final contract value = (\$1,402 per ton)(10 tons per contract) = \$14,020 You will have a loss on this futures position of: Loss on futures contract = \$14,350 – 14,020 = \$330 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: \$30 \$32 \$35 \$38 \$40 Value of call option position: 0 0 0 3 5 Value of put option position: –5 –3 0 0 0 Total value: –\$5 –\$3 \$0 \$3 \$5 The payoff profile is identical to that of a forward contract with a \$35 strike price. 5. When you purchase the contracts, your cash outflow is: Cash outflow = 25(42,000)(\$1.52) Cash outflow = \$1,596,000 At the end of the first day, the value of you account is: Day 1 account value = 25(42,000)(\$1.46)

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Day 1 account value = \$1,533,000 Remember, on a short position you gain when the price declines, and lose when the price increase. So, your cash flow is:
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