Futures contract and collar based on gold options

Assignment Help Financial Management
Reference no: EM131063135

You have just been hired as the finance director of a firm that mines gold from a gold mine and sells gold on the world market. Production is stable, but you notice that the spot price of gold varies a lot.

(a) At your first meeting with the CEO you say that you plan to hedge the price of gold using futures contracts. The CEO says “No. There is no point in using futures. There is just as much chance that the price of gold in the future will be less than the futures price, as the chance that the price of gold will be greater than the futures price”. How do you address the CEO’s claim, and how to you make the case for using futures? (Hint: Make your answer short and to the point).

(b) Compare the following two strategies for hedging the price of gold: (i) Futures contract, and (ii) a collar based on gold options. (Hint: Make your answer short and to the point).

Reference no: EM131063135

Questions Cloud

Investors with computerized information about stock prices : Linkup Systems, which provides investors with computerized information about stock prices, is considering the establishment of a lockbox system with its bank. If the lockbox system can save two days in the collection process, and the firms banker wil..
Credit default swap-market efficiency and regulation : “Despite its forbidding name, the CDS (Credit Default Swap) is a simple idea: it allows an investor to buy insurance against a company defaulting on its debt payments. Here you have some terms that come to my mind: hedging, speculation, naked positio..
Discount rate to these amounts : Carlos expects to receive $10,000 five years from now. Carlotta expects to receive $10,000 three years from now. Which one of the following statements is correct if both Carlos and Carlotta apply a 6 percent discount rate to these amounts?
Retirement plan-what is this employee benefit worth : Your employer contributes $100 a week to your retirement plan. Assume that you work for this employer for another 10 years and the applicable discount rate is 7.25%. Given these assumptions, what is this employee benefit worth to you today?
Futures contract and collar based on gold options : You have just been hired as the finance director of a firm that mines gold from a gold mine and sells gold on the world market. Production is stable, but you notice that the spot price of gold varies a lot. Compare the following two strategies for he..
What is average annual rate of return earned on investment : Fifteen years ago, you put away $5,000. Today, that investment is now worth $16,535. What is the average annual rate of return you earned on your investment?
What is the forward price of gold with delivery : The current price of gold is $1,600 per troy ounce. There are no storage costs. The risk free rate of interest is 5% continuously compounded. What is the forward price of gold with delivery in 3 months? Calculate the cost of a collar, with 3 months t..
Financial ratios and common-size financial statements : State why Walmart is a competitor of Target. Identify the reason that financial ratios and common-size financial statements are more important when contrasting the financial performance of Target to Walmart than the financial amounts reported on the ..
Calculate your payment and effective annual rate : Suppose Mary Jane wishes to take our a 30-year interest-only mortgage loan of $200,000 with an interest rate of 8%. How much will Mary Jane pay the lender EACH MONTH? You are considering a 5%, 15-year mortgage with zero points. Noting that mortgage p..

Reviews

Write a Review

Financial Management Questions & Answers

  How much should save each month

Sarah wants to go buy a house in Hawaii 15 years from now. She estimates she'll need $400,000 at that time to make this purchase. She plans to save each month at the end of the month for the next 15 years, and invest it at a rate of 8% a year, compou..

  Projects unit sales for new seven-octave voice emulation

Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 1 75,000 2 88,000 3 102,000 4 97,000 5 78,000 Production of the implants will require $1,540,000 in net working capital to star..

  What is the net income for this firm

Billy’s Exterminators, Inc., has sales of $604,000, costs of $308,000, depreciation expense of $60,000, interest expense of $40,000, and a tax rate of 35 percent. What is the net income for this firm?

  Why is this figure different from its accounting income

During 2011, Lele Design earned net income of $250,000. The firm neither bought nor sold any capital assets. The book value of its assets declined by the year’s depreciation charge of $200,000. The firm’s operating cash flow for the year was $450,000..

  What is the maximum sustainable growth rate

Bunge Corp. is expected to maintain the same payout ratio in the future as in the current year (problem #7), and the expected return on new investments for Bunge is 10%. What is the maximum sustainable growth rate for Bunge’s dividends in the long ru..

  Distribution is a taxable dividend

Misty owns stock in Violet, Inc., for which her adjusted basis is $75,000. She receives a cash distribution of $52,000 from Violet. What is Misty's adjusted basis for the stock if the distribution is a taxable dividend? What is Misty's adjusted basis..

  Stock with margin and without margin

Suppose you sell the stock at a price of $37. What is your return? What would your return have been had you purchased the stock without margin?

  Bond with ten percent coupon rate bond

A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 6 percent. What should be the current price? A bond..

  Annual compound rate of return off your original investment

You purchased a five year annual payment 6% coupon bond for $1,000 and you planned on holding it to maturity. However right after you bought the bond it was called at $1,043.29 when all interest rates fell to 5% and remained there for the full five y..

  Annum with semi-annual compounding

The six month and one-year rates are 3% and 4% per annum with semi-annual compounding. Is 3.90% or 3.95% or 3.99% closest to the one-year par yield expressed with semi-annual compounding?

  Sixplex apartment building and lives in one unit

Pedro owns a sixplex apartment building and lives in one unit. The building is insured under the Dwelling Property 1 (basic form) policy for $320,000. The replacement cost of the building is $400,000. Explain to what extent, if any, Pedro will recove..

  Calculate the current cost of a bond with a par value

A bond has a coupon rate of 3.25%, pays coupons semiannually, and has a maturity of 10 years. If the yield to maturity is 3.50%, calculate the current cost of a bond with a par value of 100. What is the current yield on the bond? What is the value or..

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