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Finance case questions I have sent 2 Question. I have answered most of the questions.

Finance case questions
I have sent 2 Question. I have answered most of the questions. Please look over my work and answer the final part of the question in the answer attachment.

Question 6 (Futures):
Packers Inc. is a U.S. based manufacturer of cheese. The company
considers expanding its current operations by building a plant in the
U.K. The CFO has presented the board with the following cash flow
projections:
Required initial outlay in U.S. dollars to be paid immediately is
\$600,000. The projected cash flows in British pounds due in exactly six
months are GBP 500,000.
The CFO informs the board that the U.S. risk-free rate is 5.5% (APR)
while the U.K risk free rate is 7.2% (APR). The current spot exchange
rate is 1.62 \$/GBP (that is, 1.62 dollars buy 1 British pound). The
futures price of the pound, for delivery in six months, is 1.61 \$/GBP.
The CFO assumes that the project is riskless and that given her
calculations the firm ought to invest in the new plant.
Assume that interest is compounded semi-annually. Ignore the fact that
futures are marked to market and assume that all cash flows connected
with the futures contract occur at the maturity of the contract.
Should the company undertake this project given the above assumptions?
Cost of project = \$600,000
Revenue from project = Ð500,000*1.61 = \$805,000
Present value of Revenue = \$783,455
Profit from project = \$783,455 - \$600,000 = \$183,455
Recommendation = Yes
Assume that the CFO can use foreign currency futures contracts on the
British Pound. Specifically, she can buy or sell 62,500 pounds per
contract for delivery in six months from today. Should she purchase or
sell such contracts if she wants to receive U.S. dollars in exactly six
The CFO should sell GBP futures contract to receive USD in six months
time.
Ð500,000 worth of contracts at Ð62,500 each
each contract = \$ 100,625
500,000 / 62500 = 8 contracts
total = \$805,000
Demonstrate that the hedge in b) works by showing that a fall of the
pound to \$1.55 or an increase in the pound to \$1.65 do not affect the
total dollar value of the cash inflow of GBP 500,000.
Cost of Ð on delivery date = 1.55 \$/Ð 62,500*8*1.55 = \$ 775,000
Cumulative futures gain per Ð = 0.6 \$/Ð 62,500*8*0.06 = \$
30,000
Net cost of Ð
1.61 \$/Ð
\$ 805,000
Cost of Ð on delivery date = 1.65 \$/Ð 62,500*8*1.65 = \$ 825,000
Cumulative futures loss per Ð = 0.4 \$/Ð 62,500*8*0.04 \$ (20,000)
Net cost of Ð
1.61 \$/Ð
\$ 805,000
( If six-month futures contracts are not available, can the CFO assure
the board that she will be able to lock in the rate for exchanging the
500,000 pounds into dollars six months from today? If so, outline what
are the transactions that she needs to undertake in order to guarantee
this rate.
Question2 (Options):
In February you observe that XYZâs stock price is \$103. The March call
option with exercise price \$100 will expire in exactly one month and is
trading at \$5. The March put option with exercise price of \$100 is
trading at \$1.50. Assume that the interest rate is 6% p.a. (continuously
compounded) and that XYZ will not pay dividends over the next month.
Calculate the payoffs for an investor who has bought one call option by
completing the table below. Draw the payoff diagram. Do not include the
Stock Price 80 100 120 140
Payoff 0 0 20 80
Payoff
0
\$100
Stock Price ST
Calculate the payoffs for an investor who has bought one XYZ share and
one put option by completing the table below. Draw the payoff diagram.
Stock Price 80 100 120 140
Payoff -3 -3 17 37
Payoff
\$100
\$100
Stock Price ST
( A friend of yours wants to purchase a futures contract on XYZ.
Unfortunately, no such contract is available and he asks for your help.
You can only buy (or sell) the above call and put options as well as buy
(or sell) bonds. Can you replicate the cash flows of the futures
contract with these options and bond? How much would your friend have to
pay today in order to set up this replication? What is the implied
futures price?

Question 1 (Futures):
Packers Inc. is a U.S. based manufacturer of cheese. The company
considers expanding its current operations by building a plant in the
U.K. The CFO has presented the board with the following cash flow
projections:
Required initial outlay in U.S. dollars to be paid immediately is
\$600,000. The projected cash flows in British pounds due in exactly six
months are GBP 500,000.
The CFO informs the board that the U.S. risk-free rate is 5.5% (APR)
while the U.K risk free rate is 7.2% (APR). The current spot exchange
rate is 1.62 \$/GBP (that is, 1.62 dollars buy 1 British pound). The
futures price of the pound, for delivery in six months, is 1.61 \$/GBP.
The CFO assumes that the project is riskless and that given her
calculations the firm ought to invest in the new plant.
Assume that interest is compounded semi-annually. Ignore the fact that
futures are marked to market and assume that all cash flows connected
with the futures contract occur at the maturity of the contract.
Should the company undertake this project given the above assumptions?
Assume that the CFO can use foreign currency futures contracts on the
British Pound. Specifically, she can buy or sell 62,500 pounds per
contract for delivery in six months from today. Should she purchase or
sell such contracts if she wants to receive U.S. dollars in exactly six
Demonstrate that the hedge in b) works by showing that a fall of the
pound to \$1.55 or an increase in the pound to \$1.65 do not affect the
total dollar value of the cash inflow of GBP 500,000.
( If six-month futures contracts are not available, can the CFO assure
the board that she will be able to lock in the rate for exchanging the
500,000 pounds into dollars six months from today? If so, outline what
are the transactions that she needs to undertake in order to guarantee
this rate.
Question 2 (Options):
In February you observe that XYZâs stock price is \$103. The March call
option with exercise price \$100 will expire in exactly one month and is
trading at \$5. The March put option with exercise price of \$100 is
trading at \$1.50. Assume that the interest rate is 6% p.a. (continuously
compounded) and that XYZ will not pay dividends over the next month.
Calculate the payoffs for an investor who has bought one call option by
completing the table below. Draw the payoff diagram. Do not include the
Stock Price 80 100 120 140
Payoff
Calculate the payoffs for an investor who has bought one XYZ share and
one put option by completing the table below. Draw the payoff diagram.
Stock Price 80 100 120 140
Payoff
( A friend of yours wants to purchase a futures contract on XYZ.
Unfortunately, no such contract is available and he asks for your help.
You can only buy (or sell) the above call and put options as well as buy
(or sell) bonds. Can you replicate the cash flows of the futures
contract with these options and bond? How much would your friend have to
pay today in order to set up this replication? What is the implied
futures price?
- PAGE 3 -

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