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For the following scenarios, describe a hedging strategy using futures contracts. Discuss the reasons for your choice of contract.
a. A bank derives all its income from long-term, fixed-rate residential mortgages.
b. A stock mutual fund invests in large, blue-chip stocks and is concerned about a decline in the stock market.
c. A U.S. exporter of construction equipment has agreed to sell some cranes to a German construction firm. The U.S. firm will be paid in euros in three months.
Finally, comment on whether using option contracts in the above cases could be better. What are the pros and cons of using options?
Raylan Givens borrows $150,000 to buy a house. The adjustable rate mortgage carries a 1.5 percent rate for the first 3 years. After that the rate will change annually to reflect market conditions. The annual cap is 2% (i.e., the largest increase in a..
Prezario's has 225,000 shares of stock outstanding with a par value of $1.00 per share. The current market value of the firm is $1,690,000. The company just announced a 2-for-1 stock split. By how much does the common stock account balance change aft..
Stock Y has a beta of 1.2 and an expected return of 13.7 percent. Stock Z has a beta of .8 and an expected return of 9.5 percent. If the risk-free rate is 5.3 percent and the market risk premium is 6.3 percent, the reward-to-risk ratios for stocks Y ..
There is a callable preferred stock at 110 par in 9 years, paying $4 annually and having a yield of 6%. Compute its price, if it is called. In case the issuing firm decides to not call it, what would its price be?
Find the present value of a perpetuity that pays $3800 every three years starting seven years from now. Assume the perpetuity has an annual effective rate of interest of 9.5%.
Consider a 30-year, $140,000 mortgage with a rate of .0620 percent. Thirteen years into the mortgage, rates have fallen to 5 percent. What would be the monthly saving to a homeowner from refinancing the outstanding mortgage balance at the lower rate ..
The Graber Corporation’s common stock has a beta of 1.1. If the risk-free rate is 4.2 percent and the expected return on the market is 12 percent, what is the company’s cost of equity capital?
Which of the following statements regarding the tax implications of key employee life insurance is correct?
You will receive a $100,000 inheritance in 20 years. Your investments earn 6% per year, compounded annually. To the nearest hundred dollars, what is the present value of your inheritance?
Show that the decision is irrelevant in a world of frictionless markets. What happens to the dividend-irrelevance result if a personal income tax of 15 percent is introduced into the model?
Emily is in the 25% bracket and has $15,000 available for investment during her current tax year. Assume that she remains in the same tax bracket over the next 7 years and determine the accumulated amount of her investment if she puts the $15,000 int..
Prepare an amortization schedule for a five-year loan of $56,000. The interest rate is 7 percent per year, and the loan calls for equal annual payments. How much total interest is paid over the life of the loan?
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