Solution of Week6

Problem 1. 7. Suppose that you write a put contract with a strike price of $40 and an expiration date in three months. The current stock price is $41 and the contract is on 100 shares. What have you committed yourself to? How much could you gain or lose? You have sold a put option. You have agreed to buy 100 shares for $40 per share if the party on the other side of the contract chooses to exercise the right to sell for this price. The option will be exercised only when the price of stock is below $40. Suppose, for example, that the option is exercised when the price is $30.You have to buy at $40 shares that are worth $30; you lose $10 per share, or $1,000 in total. If the option is exercised when the price is $20, you lose $20 per share, or $2,000 in total. The worst that can happen is that the price of the stock declines to almost zero during the three-month period. This highly unlikely event would cost you $4,000. In return for the possible future losses, you receive the price of the option from the purchaser. Problem 1. 21. â€Å"Options and futures are zero-sum games. † What do you think is meant by this statement?The statement means that the gain (loss) to the party with the short position is equal to the loss (gain) to the party with the long position. In aggregate, the net gain to all parties is zero. Problem 1. 30 The price of gold is currently $1,000 per ounce. The forward price for delivery in one year is $1,200. An arbitrageur can borrow money at 10% per annum. What should the arbitrageur do? Assume that the cost of storing gold is zero and that gold provides no income. The arbitrageur should borrow money to buy a certain number of ounces of gold today and short forward contracts on the same number of ounces of gold for delivery in one year.This means that gold is purchased for $1000 per ounce and sold for $1200 per ounce. Assuming the cost of borrowed funds is less than 20% per annum this generates a riskless profit. Problem 2. 3. Suppose th at you enter into a short futures contract to sell July silver for $17. 20 per ounce. The size of the contract is 5,000 ounces. The initial margin is $4,000, and the maintenance margin is $3,000. What change in the futures price will lead to a margin call? What happens if you do not meet the margin call? There will be a margin call when $1,000 has been lost from the margin account.This will occur when the price of silver increases by 1,000/5,000 ? $0. 20. The price of silver must therefore rise to $17. 40 per ounce for there to be a margin call. If the margin call is not met, your broker closes out your position. Problem 2. 10. Explain how margins protect investors against the possibility of default. A margin is a sum of money deposited by an investor with his or her broker. It acts as a guarantee that the investor can cover any losses on the futures contract. The balance in the margin account is adjusted daily to reflect gains and losses on the futures contract.If losses are above a certain level, the investor is required to deposit a further margin. This system makes it unlikely that the investor will default. A similar system of margins makes it unlikely that the investor’s broker will default on the contract it has with the clearing house member and unlikely that the clearing house member will default with the clearing house. Problem 2. 11. A trader buys two July futures contracts on frozen orange juice. Each contract is for the delivery of 15,000 pounds. The current futures price is 160 cents per pound, the initial margin is $6,000 per contract, and the maintenance margin is $4,500 per contract.What price change would lead to a margin call? Under what circumstances could $2,000 be withdrawn from the margin account? There is a margin call if more than $1,500 is lost on one contract. This happens if the futures price of frozen orange juice falls by more than 10 cents to below 150 cents per pound. $2,000 can be withdrawn from the margin account if the re is a gain on one contract of $1,000. This will happen if the futures price rises by 6. 67 cents to 166. 67 cents per pound. Problem 2. 21. What do you think would happen if an exchange started trading a contract in which the quality of the underlying asset was incompletely specified?The contract would not be a success. Parties with short positions would hold their contracts until delivery and then deliver the cheapest form of the asset. This might well be viewed by the party with the long position as garbage! Once news of the quality problem became widely known no one would be prepared to buy the contract. This shows that futures contracts are feasible only when there are rigorous standards within an industry for defining the quality of the asset. Many futures contracts have in practice failed because of the problem of defining quality. Problem 2. 6 Trader A enters into futures contracts to buy 1 million euros for 1. 4 million dollars in three months. Trader B enters in a forward contract to do the same thing. The exchange (dollars per euro) declines sharply during the first two months and then increases for the third month to close at 1. 4300. Ignoring daily settlement, what is the total profit of each trader? When the impact of daily settlement is taken into account, which trader does better? The total profit of each trader in dollars is 0. 03? 1,000,000 = 30,000. Trader B’s profit is realized at the end of the three months.Trader A’s profit is realized day-by-day during the three months. Substantial losses are made during the first two months and profits are made during the final month. It is likely that Trader B has done better because Trader A had to finance its losses during the first two months. Problem 2. 29. A company enters into a short futures contract to sell 5,000 bushels of wheat for 450 cents per bushel. The initial margin is $3,000 and the maintenance margin is $2,000. What price change would lead to a margin call? Under what c ircumstances could $1,500 be withdrawn from the margin account?There is a margin call if $1000 is lost on the contract. This will happen if the price of wheat futures rises by 20 cents from 450 cents to 470 cents per bushel. $1500 can be withdrawn if the futures price falls by 30 cents to 420 cents per bushel. Problem 2. 30. Suppose that there are no storage costs for crude oil and the interest rate for borrowing or lending is 5% per annum. How could you make money on May 26, 2010 by trading July 2010 and December 2010 contracts on crude oil? Use Table 2. 2. The July 2010 settlement price for oil is $71. 51 per barrel. The December 2010 settlement price for oil is $75. 3 per barrel. You could go long one July 2010 oil contract and short one December 2010 contract. In July 2010 you take delivery of the oil borrowing $71. 51 per barrel at 5% to meet cash outflows. The interest accumulated in five months is about 71. 51? 0. 05? 5/12 or $1. 49. In December the oil is sold for $75. 23 pe r barrel which is more than the amount that has to be repaid on the loan. The strategy therefore leads to a profit. Note that this profit is independent of the actual price of oil in June 2010 or December 2010. It will be slightly affected by the daily settlement procedures. Problem 3. 1.Under what circumstances are (a) a short hedge and (b) a long hedge appropriate? A short hedge is appropriate when a company owns an asset and expects to sell that asset in the future. It can also be used when the company does not currently own the asset but expects to do so at some time in the future. A long hedge is appropriate when a company knows it will have to purchase an asset in the future. It can also be used to offset the risk from an existing short position. Problem 3. 3. Explain what is meant by a perfect hedge. Does a perfect hedge always lead to a better outcome than an imperfect hedge?Explain your answer. A perfect hedge is one that completely eliminates the hedger’s risk. A pe rfect hedge does not always lead to a better outcome than an imperfect hedge. It just leads to a more certain outcome. Consider a company that hedges its exposure to the price of an asset. Suppose the asset’s price movements prove to be favorable to the company. A perfect hedge totally neutralizes the company’s gain from these favorable price movements. An imperfect hedge, which only partially neutralizes the gains, might well give a better outcome. Problem 3. 5.Give three reasons why the treasurer of a company might not hedge the company’s exposure to a particular risk. Explain your answer. (a) If the company’s competitors are not hedging, the treasurer might feel that the company will experience less risk if it does not hedge. (See Table 3. 1. ) (b) The shareholders might not want the company to hedge because the risks are hedged within their portfolios. (c) If there is a loss on the hedge and a gain from the company’s exposure to the underlying asset, the treasurer might feel that he or she will have difficulty justifying the hedging to other executives within the organization.Problem 3. 17. A corn farmer argues â€Å"I do not use futures contracts for hedging. My real risk is not the price of corn. It is that my whole crop gets wiped out by the weather. †Discuss this viewpoint. Should the farmer estimate his or her expected production of corn and hedge to try to lock in a price for expected production? If weather creates a significant uncertainty about the volume of corn that will be harvested, the farmer should not enter into short forward contracts to hedge the price risk on his or her expected production. The reason is as follows.Suppose that the weather is bad and the farmer’s production is lower than expected. Other farmers are likely to have been affected similarly. Corn production overall will be low and as a consequence the price of corn will be relatively high. The farmer’s problems arising f rom the bad harvest will be made worse by losses on the short futures position. This problem emphasizes the importance of looking at the big picture when hedging. The farmer is correct to question whether hedging price risk while ignoring other risks is a good strategy.

INTERNATIONAL BUSINESS 10 QUESTIONS Essay Example | Topics and Well Written Essays - 500 words

INTERNATIONAL BUSINESS 10 QUESTIONS - Essay Example If there are adverse economic conditions affecting the business environment in one country, they may escalate and affect other countries and have a high chance of ending up adopting global proportions. Most of the smaller global firms might find themselves unable to adequately compete on the international market as a result of lack of enough resources. This might cause them to eventually be forced out of business. Political Risk is the risk that a business or individual’s investments could end up suffering a huge loss mainly due to a result of a country’s instability or political changes in a country’s legislative body, government, military control or other foreign policy makers. It is also commonly referred to as geopolitical risk, while economic risk is the risk that a country’s macroeconomic conditions like government regulations, exchange rates and political stability will affect a business entity’s investment in that country to be economically unsustainable as a result of its profit revenues not being sufficient enough to repay its debts and cover its every day operating costs. On the other hand, legal risk is the risk that a company’s business transactions will contravene the regulatory policies in a country or parties in a business contract are not able to enter into any business contract. Managers can manage political risks by better understanding the political uncertainties in a given country and employing the use of mitigation tactics like risk diversification, intellectual property safeguards and buying political insurance. A subsidy is a form of assistance made mostly by governments mostly in the form of tax deductions or cash payments, to businesses like producers and have the result of being distributed as subventions within a given industry with the intention of preventing the overall decline of that industry in the interest of the general public. 4. (TCO D) Despite its advantages, FDI has been described as an "expensive"

Note Taking on the Current issues and the potential future of GM foods Essay

Note Taking on the Current issues and the potential future of GM foods - Essay Example They have various beneficial traits key among them being their herbicide e, and insect and viral resistance. Additionally, they also have some nutritional enhancements. Food allergy has been a major concern to most people on the use of the GM crops. This has related much to the amount, type and synthesis of the proteins in these GM crops. There are other risk issues but these too have had little to do with most of the technologies applied (Baram, and Bourrier, 2014, p.10). Summary; Risks and safety issues relating to the use of the GM food and feed have been of particular concern to the masses. Allergic reactions have been experienced by some users and thus safety assessments must be carried out for these foods and the technologies used in producing them. Based on these concerns, critics of the technology have engaged in various activities to dissuade consumers of the products using facts that are not true and whose results are pegged on misinterpreted data sets from inappropriate test systems (Goldstein, 2014, p.195). Goldstein, D. A., (2014). Tempest in a Tea Pot: How did the Public Conversation on Genetically Modified Crops Drift so far from the Facts?. Springerlink.com, x(1), p. 194–201.

Economics Assignment Example | Topics and Well Written Essays - 500 words - 8

Economics - Assignment Example Through this, it would have saved some money that would be used for purchasing land and equipments, acquiring licenses and constructing the new premises. If a new branch is formed from scratch, the business would have forgone the costs that would be associated with the formation of a merger. If the business decided to collaborate with an already existing one, it will not need to incur costs such as construction, buying of new equipments and recruiting of new staff. All these would be forgone if a new branch is opened in another location. On the other hand, the business can opt for employing part-time employees instead of recruiting full time workers. As the best alternative, having part-time workers will be cheaper than full time employees. First, since they will be on a part-time basis, they will need to be paid less wages and salaries. At the same time, they will not be entitled to lots of benefits such as pension and insurance schemes. All these will be forgone if the business decides to recruit additional full-time workers to enable it deal with the increased demand of its products. As a matter of fact, the costs of engaging additional full-time workers would be higher because, unlike their part-time counterparts, they would have to be paid higher salaries, attractive allowances and entitled to lots of benefits such as pension schemes and medical covers. However, all these would change if the increased demand was a temporary occurrence. In this situation, the management would need to come up with short term measures. Of all the alternatives, I would like to suggest that the business should set up retail outlets and chain stores in different parts of the country. It can be the best alternatives to adopt in case short-term measures are required. It qualifies as the best alternative since it would enable the business to minimize its expenses. It is not recommended to establish a new branch if the increase in demand is only expected to last for a short period of

PEPFAR Essay Example | Topics and Well Written Essays - 500 words

PEPFAR - Essay Example PEPFAR, the largest and most ambitions healthcare initiative in history came into being on January 1st, 2003. In response to ever-increasing concerns over the social, political and economic consequences of AID, the United States passed PEPFAR into public policy/legislature and declared a 15 billion dollar commitment to the policy. While PEPFAR is dedicated to the fight against AID as a global epidemic, its primary focus is upon the 15 countries which have the highest incident rates, those being Botswana, Cote d'Ivoire, Ethiopia, Guyana, Haiti, Kenya, Mozambique, Namibia, Nigeria, Rwanda, South Africa, Tanzania, Uganda, Vietnam, and Zambia. Public bill 108-25 outlines PEPFAR's aims and objectives, further establishing its mechanisms and strategies for service delivery. As clearly outlined in PB 108-25, PEPFAR's AID-combat philosophy is governed by the ABC principle, or the "Abstain, Be faithful, use Condoms" model, whose effectiveness has, since 1986, been established upon implementation in all of Uganda, Jamaica, Ethiopia and Senegal. PEPFAR's immediate objectives are the provision of Antiretroviral treatment to approximately 822,000 people living with HIV in the previously mentioned focus countries, expected to increase to 2 million, the extension of care to a total of 10 million and the prevention of approximately 7 million new infections

Introduction to Business Essay Example | Topics and Well Written Essays - 500 words - 5

Introduction to Business - Essay Example This paper reviews the importance of communication channels in business organizations. In addition, it looks into the ways through which communication channels can help business organizations to improve on their performance and gain competitive edge over their competitors. An effective communication channel will ensure that information reaches the intended persons. It should be noted that communication channels enables managers as well as other individuals within an organization to send information and receive feedback. Therefore, effective communication channels will ensure that a given message is sent to the target audience and the feedback is got. Effective and efficient communication channel within organizations is capable of maintaining excellent relationships between employees and the management of the organization. Through it, employees will be encouraged to share their ideas that may be implemented and this is capable of enhancing an organization’s performance. Through effective and efficient communication channels, employees are capable of submitting their comments, work accounts, grievances as well as recommendations. Moreover, when organizations have effective as well as speedy communication channels, delays will be prevented and results will be achieved. Good communication channels are beneficial to organizations because it will enhance motivation since employees will be informed and clarified concerning works to be conducted as well as the manner in which they are to be conducted very quickly. In addition, it will enable employees to enhance on their performance when it is below the expectations. The productivity of organizations will thus be improved. Similarly, good communication channels will ensure that the individual attitudes of employees are altered since they will be well informed very quickly. It should be noted that proper communication

Financial Economy Crisis and Its Influence on Society Essay

Financial Economy Crisis and Its Influence on Society - Essay Example These periods in time had a demonstrable and defininitive impact upon how the economic cycle, the American dream, and risk taking came to be understood. Firstly, in order to understand the Industrial Revolution, it must be understood that this was a period of runaway growth for almost each and every industry within the United States. Although it is oftentimes tempting to assume that the Industrial Revolution was only concentric upon benefiting the moguls that owned the iron and steel mills throughout the Northeast, almost each and every sector of the American economy experienced a level of growth as a result of this point in time. However, it must also be understood that the individual worker was at a distinct disadvantage for much of the Industrial Revolution. ... ervasive spirit of the era was one that believed that the growth that was being experienced and exhibited throughout the economy could somehow continue to be sustainable in perpetuity. By way of comparison, the period of the Great Depression evidenced a distinctly different, arguably opposite, societal, economic, and political approach. As a result of the fact that there were few if any jobs, investment was drying up, trust and availability of the currency was drying up, and little if any safety net existed for the people of the era, a true level of malaise and â€Å"depression† set in and defined the era. This is of course denoted with regards to such factors as the stagnation of the labor markets and the ultimate hardship that individuals felt with regards to the outlook for â€Å"bettering their position† in life. Obivously this has a direct correlation to the extent to which the â€Å"American dream† was believed to be a reality. Due to the fact that the mean s of creating â€Å"American way of life† was all but removed, it became incumbent upon the government and political sectors of the system to intervene and express the will of the people to fix the problems that were systemically plaguing and beleaguering the system. Such a point of view is rather well represented within the famous film â€Å"It’s a Wonderful Life†. Although a complex plot is woven around different types of hardship that cannot be defined purely economically, it is the economic hardship that is the final straw in prompting the main character towards the course of action that he takes. The economic hardship and the social fabric are two elements that are extensively represented within the film and two elements that factored heavily into how the Great Depression was felt within the United States