13. Explain what is meant by basis risk in the situation where a company knows it will be purchasing a certain asset in two months and uses a three-month futures contract to hedge its risk.
Q: Joe Levi bought a home in Arlington, Texas, for $141,000. He put down 25% and obtained a mortgage…
A: Fist we need to calculate monthly mortgage payment by using PMT function in excel…
Q: Additional Information: (a) Gross profit rate for 2019 is 50%, which decreased by 5% in 2020 due to…
A: While preparing an income statement, we can use ratio analysis to find out the missing figures. For…
Q: What trust, privacy and ethical issues do businesses need to be concerned with when trading online?…
A: The main trust, privacy and ethical concerns of business while doing online trading are as follows:…
Q: Explain the process of securitisation as carried out by banks and discuss its role in the 2008…
A: Securitization Securitization is the process of grouping or pooling together numerous financial…
Q: q7 Lightening Bulk Company is a moving company specializing in transporting large items…
A: The quantity of funds generated by an investment after all revenue items have been collected and…
Q: School fees at a certain school are due at the beginning of the year. The fees are set at R12000 for…
A: This question can be answered in light of time value of money. The time value of money is a concept…
Q: Suppose, a passive portfolio, that is, one invested in a risky portfolio that mimics the DSE Broad…
A: Ans: (i) Currently the client has invested in active portfolio. So his expected return is 13% and…
Q: Data for two alternatives are as follows: Alternatives A B Investment P35, 000 P50, 000 Annual…
A: NPV is the difference between the Present Value of Cash Inflows and Initial Investment. A project…
Q: Payments of Ordinary Annuities Ryan wants to get together $40 000 to purchase the first house in his…
A: Solution:- When an equal amount is deposited each period at end of period, it is called ordinary…
Q: Suppose you have purchased a 10% coupon bond with a face value of 1410 KWD at a pric that after one…
A: Current yield and capital gain yield are two components of holding period return that is being…
Q: can afford a monthly payment of $1,000. He wants to take out a $60,000 loan at 8% interest rate.…
A: Loans are paid by the equal monthly installments these installments carry the payment for principal…
Q: ou are considering an investment in Justus Corporation's stock, which is expected to pay a dividend…
A: First we need to calculate the growth rate: Calculate the growth rate using the following formula:…
Q: 1. Suppose for an investment of $500, you will receive a monthly payment of $2 for perpetuity…
A: As per the information provided: Investment amount = $500 Monthly payment = $2 for perpetuity…
Q: A firm has a debt-to-equity ratio of 0.50. Its cost of debt is 12%. Its overall cost of capital is…
A: To calculate the cost of equity we will use WACC formula as follows: WACC = [Ke*E]+[Kd*D] Where…
Q: The Nunal Corporation finds that it is necessary to determine its marginal cost of capital. Nunal’s…
A: The Weighted Average Cost of Capital (WACC) refers to the financial ratio that calculates the…
Q: A check was issued by L. The name of the payee written on the face of the check is “Cardo Dalisay…
A: a)Order Instrument-An order paper, also known as an order instrument, is a negotiable instrument…
Q: Suppose that 10 years ago you bought a home for $160,000, paying 10% as a down payment, and…
A: A mortgage is a loan on a property where the collateral to the loan is the property itself.
Q: The number of shares traded by Abercrombie & Fitch on July 7, 2016 was:
A: The number of shares traded by a a company on a particular day is equal the volumes traded for that…
Q: An investment opportunity will pay £100 with a 10% probability, £50 with a 40% probability, or will…
A: Expected value can be calculated as follows = Investment return x Probability There is certain…
Q: And investor plans to invest $500 a year and expect to get a 10.5% return if the investor makes…
A: Future value refers to the value that an amount would assume at a future time period after…
Q: National Corporation finances its projects with 40 percent debt, 10 percent preferred stock, and 50…
A: Yield to maturity = 0.084 Cost of preferred stock = 0.09 Cost of common stock = ? Risk free rate =…
Q: Your boss asks you to review an option to lease an equipment storage facility that the firm needs.…
A: Present value of the annuity due Annuity due is a series of equal payment at equal interval,…
Q: professional letter of etiquette and engagement letter.
A: Professional letter writing and normal writing are entirely different. Letter of etiquette should be…
Q: Last year Vaughn Corp. had sales of $315,000 and a net income of $17,832, and its year-end assets…
A: Du-Pont: A Du-pont analysis is the equation which calculates the return on equity by multiplying net…
Q: Oscar was given a credit card with an APR of 21%. What was his monthly periodic rate? A. 21% B. 2.1%…
A: APR is annual rate of return calculated considering 12 months credit period. To calculated monthly…
Q: A company has $20 billion of sales and $1 billion of net income. Its total assets are $10 billion.…
A: We are provided with financial information for a company. The provided financial information will be…
Q: The capital budgeting director of Sparrow Corporation is evaluating a project that costs $200,000,…
A: IRR signifies the rate of return at which the NPV is zero. This signifies what rate of return is…
Q: The company just paid a $1.48 annual dividend and announced the plans to pay $1.54 next year. The…
A: Constant and non-constant growth dividend model : The main distinction between a constant and…
Q: Natural Foods Inc. is planning to invest in new manufacturing equipment to make a new garden tool.…
A: Working Note #1 Calculation of sales revenue: Sales revenue = No. of units sold * Selling price per…
Q: Don Solomon wants to set up a scholarship program with his alma mater. If ₱778111 is needed per year…
A: Since the scholarship program will be run to perpetuity hence, to pay the annual scholarship, the…
Q: Profitability Ratio for pepsi CO
A: The profitability ratio shows the efficiency of a company in making a profit. The profitability…
Q: Where did global financial crisis begin?
A: After the great depression of 1930 the global financial crisis was seen in 2007-2008 based on…
Q: Alfredo wants to know how much he must put in a bank account today to have within 14 years an amount…
A: Here, To Find: Conversion rate to the current dollar and the present value of an investment with…
Q: Archer Arrow Company examined its cash management policy and found that it takes an average of 5…
A: Given Number of customer per day P80,000 Number of days checks received from customers is 4 days
Q: Solve manually using formulas. Xia received an HMO card which allows her to reimburse all of her…
A: The future value is used to measure how much money an account will hold after certain deposits have…
Q: Xia has an inheritance in a trust fund left by her recently deceased mother that will pay 50,000 at…
A: Present value of annuity Annuity is a series of equal payments at equal interval till the maturity.…
Q: All of the following are the steps to figure out "The Rule of 72" EXCEPT Find the interest rate. O…
A: The General Financial Rules (GFRs) are a collection of rules and orders issued by the Indian…
Q: Determine the PW (Present Worth) at 7% and at 8% of the given cash-flow diagram. Use MS Excel
A: Present worth using 7% Present worth using 8%
Q: JL Bank offers a business loan with an initial amount of 6,000,000 pesos at a rate of 3% compounded…
A: Loan Amortization: It is the most common way of scheduling out a fixed-rate credit into equivalent…
Q: one key difference between option contracts aND FUTURE CONTRACTS IS THAT IN AN OPTION CONTRACT, THE…
A: Option Contract-An options contract is a contract between two parties to facilitate a potential…
Q: Bostian, Inc. has total assets of $520,000. Its total debt outstanding is $185,000. The Board of…
A: Debt-to- asset ratio is the percentage of the debt with respect of total asset Debt-to-assets…
Q: Assume a borrower is purchasing a property for USD 100,000 and faces two possible loan alternatives.…
A: CPM mortgages: CPM mortgages are Constant Payment Mortgages where the amount paid each month towards…
Q: Critically analyse the following concepts within the context of factor investing: (i) multi-factor…
A: An investment is an asset or item purchased for the purpose of generating an increase in income or…
Q: Pedro borrows P300,000.00 from lender ABC today at 12% compounded monthly. To fulfill his…
A: As you have asked a multiple subpart question, we will answer the first three subparts for you. To…
Q: Question 2 A project that costs $21,500 today will generate cash flows of $7,700 per year for seven…
A: As per formula of payback period Payback period = Initial project cost/Annual cash inflow Where…
Q: Derivatives are used both to hedge against risk and to acquire risk, both of which are geared…
A: The answer is Option B. Both are false.
Q: , what is 95% VaR? Explain the pros and cons of using VaR.
A: Value at Risk (VaR) is widely used in risk analysis to measure and control the level of risk that a…
Q: Adrian pays ₱608497 cash and the balance in 17 quarterly payments of ₱24588 for a house and lot. If…
A: Cash payment (DP) = P608497 Quarterly payment (P) = P24588 Number of quarterly payments (n) = 17…
Q: How much money should be invested in a financial institution that pays 3.25% simple interest if the…
A: In order to calculate the future value of the given amount using simple interest, we multiply the…
Q: 17. Liquidity risk is a chance that an investment cannot be easily liquidated: True False
A: As per Bartleby Honor Code, when multiple questions are asked, the expert is required only to solve…
13.
Explain what is meant by basis risk in the situation where a company knows it will be purchasing a certain asset in two months and uses a three-month futures contract to hedge its risk.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
- (i) A forward contract with 12 months to maturity is written on an underlying stock. The stock price is $45, and it is expected to pay dividends of $2 after 6 months and $3 immediately prior to maturity. The relevant riskless rate of interest is 4%. Calculate the theoretical forward price and initial value of the forward contract and explain the forward pricing relationship. (ii) Provide a numerical example of an arbitrage strategy for situations where the forward is trading above, and below the theoretical forward price.Suppose that the standard deviation of quarterly changes in the prices of a commodity is $0.65, the standard deviation of quarterly changes in a futures price on the commodity is $0.81, and the coefficient of correlation between the two changes is 0.8. What is the optimal hedge ratio for a three-month contract? What does it mean? Explain what is meant by basis risk when futures contracts are used for hedging.17. Consider two securities that pay risk-free cash flows over the next two years and that have the current market prices shown here: Security Price Today Cash Flow in One Year Cash Flow in Two Years В1 $192 $200 B2 $176 $200 a. What is the no-arbitrage price of a security that pays cash flows of $200 in one year $200 in two years? b. What is the no-arbitrage price of a security that pays cash flows of $200 in one year and $1600 in two years? c. Suppose a security with cash flows of $100 in one year and $200 in two years is trading for price of $260. What arbitrage opportunity is available? and a
- Consider a security that pays income to its holders (e.g., a dividend-paying stock, or acoupon bond). Should the forward price of this security (for a contract that matures attime T), F0,T, be higher than, lower than, or equal to the security's current spot price?Why?.Which of the following increases basis risk? Select one: O a. Alarge difference between the futures prices when the hedge is put in place and when it is closed out O b. Dissimilarity between the underlying asset of the futures contract and the hedger's exposure Oc. A reduction in the time between the date when the futures contract is closed and its delivery month O d. None of the aboveD3) The value of a derivative that pays off $100 after one year if a company has defaulted during the year is $5. The value of a derivative that pays off $100 after one year if a company has not defaulted is $97. (a) What is the risk-free rate? (b) What is the risk-neutral probability of default?
- Select all statements which are correct. As the delivery month of a futures contract is approached, the futures price converges to the spot price of the underlying asset. In case the balance on the margin account falls below the maintenance margin, there is a margin call and a deposit must be made to bring the balance back to the initial margin. A futures contract is very similar to a forward contract. The major difference is that futures contracts are traded on an exchange and settled daily, whereas forward contracts are traded over-the-counter and are only settled at maturity.Which of the following increases basis risk? Select one: O a. A large difference between the futures prices when the hedge is put in place and when it is closed out O b. Dissimilarity between the underlying asset of the futures contract and the hedger's exposure O c. Areduction in the time between the date when the futures contract is closed and its delivery month O d. None of the aboveWe define basis as futures price minus cash price. In general, what is the expected sign of the basis one month prior to expiry for oil sold on the spot market at the futures contract’s delivery location? (i) positive (ii) negative (iii) zero
- 8. Buy one July 170 put contract. Hold it until the option expires. Determine the profits and display the results in a chart (include profits for the following underlying stock prices: 130,140,150,160,170,180,190). Identify the breakeven stock price at expiration. What is the maximum possible gain and loss on the transaction?a. A futures contract on a non-dividend-paying stock index with current value $130 has a maturity of one year. If the T-bill rate is 6%, what should the futures price be? b. What should the futures price be if the maturity of the contract is 2 years? c. What if the interest rate is 9% and the maturity of the contract is 2 years? Complete this question by entering your answers in the tabs below. Required A Required B Required C A futures contract on a non-dividend-paying stock index with current value $130 has a maturity of one year. If the T-bill rate is 6%, what should the futures price be? Note: Round your answer to 2 decimal places. Futures priceSuppose a company knows the quantity of a commodity that it willproduce. Describe how it might hedge using a futures contract.