What is the value of power associates

Assignment Help Finance Basics
Reference no: EM13525097

Power Associates is a one-year firm that wants to perfectly hedge its cash flows next year. That is, it wants to completely eliminate the riskiness of its cash flows by selling a certain number of futures contracts on a commodity index. The table below details the cash flows produced by Power Associates and the value of the commodity index in each possible state of the world next year:
Assume that the expected return on Power Associates and the commodity index are 20 percent. Also assume a risk-free rate of 5 percent.
a) What is the value of Power Associates?
b) What is the one-year futures price on the commodity index?
c) How many index futures contracts would you have to sell to perfectly hedge the Power cash flows?
d) What is the expected cash flow next year from the futures position? This number should be negative - explain why this is the case.
e) What is the value of Power Associates now that it has hedged its cash flows? Compare this value to the value you calculated in part (a).

Reference no: EM13525097

Questions Cloud

Ad hominem-appeal to false authority-faulty emotional appeal : TYPES OF FALLACIES: Ad hominem, appeal to false authority, faulty emotional appeal, hasty generalization, post hoc, two wrongs make a right, straw man, slippery slope, non sequitur, begging the question, appeal to tradition, false dilemma, and ad ..
How many nodes appear in the resulting standing wave : Two sinusoidal waves, each of wavelength 5 m and amplitude 10 cm, how many nodes appear in the resulting standing wave
What is your interest payment : What is your interest payment considering this change?
State the ph at the equivalence point for the titration : What is the ph at the equivalence point for the titration of .20M nitrous acid by .20M sodium hydroxide
What is the value of power associates : a) What is the value of Power Associates?
What volume of na2s solution would be needed to precipitate : What volume of .105 M Na2S solution would be required to precipitate all the copper(II)ion from 27.5mL of.121M CuSO4 solution?
Issuing new shares of common stock : Cayman's Crafters is also considering issuing new shares of common stock.
Find what angle upstream should she have headed : Sheena can row a boat at 3.10 mi/h in still water. She needs to cross a river that is 1.11 mi wide with a current flowing at 1.77 mi/h. Not having her calculator ready, what angle upstream should she have headed
Journalize the entry to record the period annual : Journalize the entry to record the period annual and journalize the entry to record the payment of payroll

Reviews

Write a Review

Finance Basics Questions & Answers

  Opinion polls attempt to predict the results of local

opinion polls attempt to predict the results of local state and federal elections. discuss six reasons why the results

  What is the operating cash flow for year four

The salvage value of the fixed assets is $6,900 and the tax rate is 34 percent. What is the operating cash flow for year four?

  Investment analysis

Establish an estimated growth rate in earnings & dividends for British Petroleum. Note, in the dividend growth model, "g" is growth rate for earnings & dividends.

  It implements a money market hedge

a. Determine the amount of dollars that Narto Co. will receive at the end of 1 year if it implements a money market hedge.

  Explain the term foreign direct investment

Explain the term Foreign Direct Investment and critically assess whether Foreign Direct Investment can be beneficial to both developed and developing economy? what are its implications. use examples in your illustration.

  Compute bonds yield to call

A newly issued corporate bond has twenty years to maturity. The bond has a coupon rate of 8 percent and pays interest semiannually. Also the bond is callable in six years at a call price equal to 115% of par value.

  Calculate the unweighted index using the geometric average

I really need help with this home work, I just can't do this. please show me the calculation, you will be a life safer.

  What is the equity multiplier

Harold's Hardware has total assets of $773,000 and total debt of $189,000. What is the equity multiplier?

  If there is 10 inflation in mexico 15 inflation in turkey

question 1.a if there is 10 inflation in mexico 15 inflation in turkey and the turkish lira weakens by 20 relative to

  Determine the annualised cost of the loan

Determine the annualised cost of the loan for each of the following outcomes, assuming interest is based on 90 days and a 365 day year

  What is the required rate of return on the sanding machine

Initially Firm A has a beta of 1.3, when Rrf= 7 percent and Rm=12 percent. The firm now sells 10 percent of its assets (beta=1.2) and uses the proceeds to purchase another asset, a sanding machine, with a beta of .7.

  What is the future value of your retirement after 12 years

Future value of annuity problem. You deposit $8,000 into a retirement account at the end of the next 12 years earning 10% interest, what is the future value of your retirement after 12 years?

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