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FIN 787Homework 5

# FIN 787Homework 5 - FIN 787 Homework 5 Viet Le 1 The hedge...

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FIN 787 Homework # 5 Viet Le 1. The hedge ratio: 0.6x1.5 = 0.9 The company has an exposure to the price of 100 million gallons of the new fuel. Therefore, it should take a position of 100x0.9 = 90 million gallons in gasoline futures. The company has to go long in this case to offset the risk of increasing price of new fuel. The future contract required: 90,000,000/42000 = 2143 2. a. To hedge the April 2012 purchase the company should take a long position in May 2012 contracts for delivery of 100,000 bushels of corn. The total contract required is: 100,000/5,000= 20. The company A long position in 16 December 2012 is required to hedge the November 2012 purchase. For the April 2013 purchase the company could take a long position in 16 December 2012 contracts and roll them into May 2013 contracts during November 2012. For the Nov 2013 purchase the company could take a long position in 16 December 2012 contracts and roll them into December 2013 contracts during November 2012. The strategy is: - Jan 2012: Enter into long position in 48 December 2012 contracts.

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FIN 787Homework 5 - FIN 787 Homework 5 Viet Le 1 The hedge...

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