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Risk Management Chapter 3

1. Its March 1. A U.S. company expects to sell 50 million apanese yen !or "ollarsat the en" o! #ly. $he Sept !#t#res price !or the yen is c#rrently 0.%& cents peryen. 'hat is yo#r he"ging strategy (position) n#m*er o! contracts+,

-ne possi*le o#tcome is This Company should enter short into theSeptember futures contract to hedge the sale of the Japanese Yen.Spot price at en" o! #ly / 0.%Septem*er !#t#res price at en" o! #ly / 0.%5asis at the en" o! #ly / 20.005.'hat is the net exchange rate a!ter he"ging,(0.%&2.%5+ 0.%/0.%%50cents4yen

. It is #ne &. A company knos that it ill nee" to p#rchase 0)000 *arrels o!cr#"e oil sometime in 6o7em*er. $he c#rrent 8ecem*er oil !#t#res price is 9:&per *arrel. 'hat kin" o! he"ging strategy sho#l" the company take, Ass#me the

company is rea"y to p#rchase oil on 6o7 10. Spot price on 6o7 10 / 9%5)8ecem*er !#t#res price on 6o7 10 / 9%) hat is the *asis on 6o7 10, hats thenet cost o! oil a!ter he"ging, This Company should enter long into theDecember futures contract to hedge the purchase of crude oil. (68-

!"#$%&'barrel

')!****%&'+,!*+***

3. $he stan"ar" "e7iation o! monthly changes in the spot price o! li7e cattle is ( incents per po#n"+ 1.. $he stan"ar" "e7iation o! monthly changes in the !#t#resprice o! li7e cattle !or the closest contract is 1.;. $he correlation *eteen the!#t#res price changes an" the spot price changes is 0.%. It is no -ct 15. A *ee!

pro"#cer is committe" to p#rchasing 00)000 po#n"s o! li7e cattle on 6o7 15.$he pro"#cer ants to #se the 8ec li7e

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The eta 2ndicates that a short postion should be ta/en. '.($*+***)*"

($*)'$**"%!6%number of contracts that should be shorted.

5. A company has a 90 million port!olio ith a *eta o! 1.. It o#l" like to #se!#t#res contracts on the S?> 500 to he"ge its risk. $he in"ex !#t#res price isc#rrently 10&0) an" each contract is !or "eli7ery o! 950 times the in"ex. 'hat

sho#l" the company "o i! it ants to re"#ce the *eta o! the port!olio to 0.:,1.@(0)000)000+4(50@10&0+/&

In or"er to re"#ce the *eta) e co#l" re"#ce the & contracts *y hal! "#e to the"irect proportionality *eteen *eta an" contracts. ;; to ;5 contracts ill pro"#cethe "esire" *eta.

:. Its no -ct 00%. A company anticipates that it 1 million po#n"s in A#g#st00& an" "eci"es to he"ge its risk !#lly. Ass#me the market prices o! !#t#rescontract to"ay an" at !#t#re "ates are as !ollos (in cents per po#n"+ 'hatpositions sho#l" the company take, 'hat is the e!!ecti7e selling price per po#n"

o! copper, $he siBe o! copper contract is 5)000 po#n"s per contract.

8ate -ct 0% e* 0& A#g 0&

Mar 0& #t#res >rice 3% 3:

Sept 0& #t#res >rice 3%1 3:5

Spot >rice 3%1 3:& 3:;

1)000)00045)000/;0 contracts

3ct *- 4nter 5arch 8thutures contract

eb *8-Close out 5arch *8 futures contract and enter into September7s

futures contractug *8 9Close out Septembers utures contract and sell at spot price.

(!-6:" # ('-6$" #6,%&!$*** pounds%'.,:! cents per pound