What will be the profit or loss on the futures contract

Assignment Help Financial Management
Reference no: EM13883489

Hedging to offset risk (LO5) The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at $138,000 per contract. It is July and the contracts must be closed out in December of this year. Long-term interest rates are currently 13.3 percent. If they increase to 14.5 percent, assume the value of the contracts will go down by 5 percent. Also if interest rates do increase by 1.2 percent, assume the firm will have additional interest expense on its business loans and other commitments of $53,000. This expense, of course, will be separate from the futures contracts.

a. What will be the profit or loss on the futures contract if interest rates go to 14.5 percent by December when the contract is closed out?

b. Explain why a profit or loss took place on the futures contracts.

 c. After considering the hedging in part a, what is the net cost to the firm of the increased interest expense of $53,000? What percent of this $53,000 cost did the treasurer effectively hedge away?

d. Indicate whether there would be a profit or loss on the futures contracts if interest rates went down.

Reference no: EM13883489

Questions Cloud

Calculate the tax disadvantage to organizing : Calculate the tax disadvantage to organizing a U.S. business today as a corporation, as a compared to a partnership, under the following conditions. Assume that all earnings will be paid out as cash dividends.
Compounded quarterly to reach your goal : Suppose you want to have a balance of $31,000 in an account in 8 years. How much money do you need to deposit quarterly if the account earns 6% compounded quarterly to reach your goal?
How do two research conclusions play off each other : Here you have the chance to dig into the details of these research theories and offer you own analytical commentary. A shortcut to this topic is, "How do two research conclusions play off each other?" An example (not using 600 materials to avoid l..
A stock has an expected return : A stock has an expected return of 13.2 percent, the risk-free rate is 8.5 percent, and the market risk premium is 10 percent. What must the beta of this stock be?
What will be the profit or loss on the futures contract : Hedging to offset risk (LO5) The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at $138,000 per contract. What will be the profit or loss on the f..
Telephone transmission rate : The Telephone transmission rate at the T3 level is 44.7 Mb/s. Each telephone message accupies 64,000b/s. How many simultaneous message could be set along this system?
Annual increase in the value of certificate : Suppose that in 2010, a $5 silver certificate form 1898 sold for 12,200. For this to have been true, what would the annual increase in the value of the certificate have been?
Bond equivalent yield and the effective annual return : A Treasury bill with 132 days to maturity is quoted at 96.540. What is the bank discount yield, the bond equivalent yield, and the effective annual return? (Do not round intermediate calculations. Enter your answers as a percent rounded to 3 decimal ..
Psychological stages of dying : Elisabeth Kübler-Ross proposed five psychological stages of dying: denial and isolation, anger, bargaining, depression, and acceptance

Reviews

Write a Review

 

Financial Management Questions & Answers

  What is the percentage cost of trade credit to customers

McDowell Industries sells on terms of 3/10, net 30. Total sales for the year are $540,500; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 54 days after their purchases. What is the average amount of ..

  How might financial managers budget for unforeseen changes

How might financial managers budget for unforeseen changes and improvements in information technology that require large capital outlays

  Interbank lending and borrowing rates exist

You expect that the INR will depreciate against the dollar from its spot rate of $.0.15 to $.0.125 in 60 days. The following interbank lending and borrowing rates exist: How can you profit from the above given information. Estimate the profits that c..

  What is maximum percentage loss you can incur option buyer

What is the maximum percentage loss you can incur as an option buyer?

  What must the annual coupon rate be on the bonds

Kathy wants to buy bonds on the market with 10.5 years to remaining maturity, a current yield to maturity of 10%, and current price of 102 (total par - $1,000,000). The bonds make semi annual payments. What must the annual coupon rate be on the bonds..

  Dollar-weighted return is equal to the time-weighted return

On 1/1/14 I invested $30,000. On 6/1/15, my fund is worth $32,000, and I deposit/withdraw M dollars. On 12/31/15, my fund is worth $30,000. The dollar-weighted return is equal to the time-weighted return in 2015. Calculate the value of M and M is not..

  Required rate of return for these bonds by investing public

ABC $1,000 par value bonds are currently selling for $888. These bonds have a coupon interest rate of 8% and mature in 8 years. What is the required rate of return for these bonds by the investing public?

  What is peters retirement number

Peter Griffin plans to retire in 20 years (1st withdrawal in year 21). He is told by Glenn Quagmire that he will need about $135,000 per year to fund his retirement. Peter wants to be able to maintain that level of purchasing power forever (Assume in..

  1 which index is your company a member of explain the

1. which index is your company a member of? explain the important characteristics of this index.2. what is the current

  How does a current account deficit benefit u.s. citizens

What is a current account deficit? Specifically, what does it mean that the U.S. isrunning a current account deficit? How does a current account deficit benefit U.S. citizens? Howdoes a current account deficit hurt U.S. citizens?

  Complete the balance sheet-debt to assets-current ratio

Complete the following balance sheet for the Seymour Hoffman Company using the following information:

  What are the two components of total return for a bond

Suppose the market for lending is risk-free and perfectly efficient. Use an arbitrage argument to show there can only be one market interest rate. What are the two components of total return for a bond? How do bond dealers make money?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd