Business Notes

1.Your company buys, sells, and stores warehouses full of gold. Today, the The Sp 2 index eguals the sume of stock prices for companies A& Z today: pa=37.pz=78

futures price for gold with delivery in one year is $360 per ounce. The spot price

is $370 per ounce. Your company is able to invest and borrow at the riskfree

interest rate of 6.6%. Furthermore, your company can, if necessary, store and

safeguard an additional 1000 ounces of gold for virtually free. Which statement

about the present value of arbitrage profits on 1000 ounces of gold is correct?

2. Awhile ago futures contracts for crawdads (1500 lbs. per contract) traded at a

futures price of $5.00 per lb. Today the futures price is $5.50 . The margin on

the contract is 1.25%. For an investor that was long one contract during this

period, what is the rate of return?

3. Today is Jan. 2, 2525, and the Company plans on harvesting 40,000 bushels

of soybeans in October at the local market. Currently, soybeans cost $4.00 /bu

in the local cash market, and $4.10 in the futures market for November delivery.

The Company today enters an appropriate position on 5 of these futures

contracts (8,000 bu. each). The Company intends to close the futures position in

October, settle in cash, and use the cash flows from the futures market to hedge

movements in soybean prices at the local market. In October, the Company

delivers 40,000 bushels in the local market for the cash price of $5.20 . Also in

October, the Company closes its futures position on the November contracts at a

futures price of $5.30 . Which statement about this hedging activity is correct?

4. Suppose a company in the USA has a chance to buy its product

internationally for either (i) 33600 rupees or (ii) 28200 pesos. Shipping and other

costs are identical. The company will exchange its USD into foreign currency at

current exchange rates: 1 USD = 6.10 rupees , and 1 USD = 7.87 pesos .

Which statement is most accurate?

5. The company requires revenue of $150,000 USD on this particular export sale

in order to cover costs and fair profit. The company accepts payment in the

purchaser’s local currency, which is rupee. Today’s spot rate is that 1 USD =

9.20 rupee. Suppose the company makes a bid in rupee to sell the product such

that at today’s spot rate the required revenue is obtained. The purchaser agrees

to pay the bid. Several weeks later at time of delivery the purchaser makes the

agreed upon payment in rupee. By that time, however, the rupee appreciates

3% relative to the USD. How much does the company receive in USD from the


6. A futures contract provides the opportunity to lock-in the exchange rate at

which you can buy or sell 200,000 peso . The futures price, quoted in U.S. cents

per peso, currently is 94.10 . The margin requirement is 1.75%. You enter long

on one contract. Thereafter, the peso appreciates 6% relative to the USD. You

then close your futures position. What was your profit (loss)?

7. The Company hopes to win a job for delivering its product to an overseas

client. The Company must submit a bid to the client stating the cost of the job,

and the client decides whether or not to hire the Company. The Company

estimates they can produce the product over the next few months at a pretax

cost of $80,000 ; their target pretax profit margin (= Pretax profit ÷ Sales revenue

) for this job is 17%. The Company is willing to accept payment from the client in

foreign currency (krone). The spot exchange rate today is 1 USD = 0.8700

krone. The company makes a bid, in krone, such that if exchange rates remain

constant the company gets the target pretax profit margin. The client agrees to

pay the Company its requested bid, but by the time the Company receives the

payment, the krone has depreciated by 20 percent relative to the dollar. How

much is the actual pretax profit in USD?

8. Company shares have a current market price of $47.40 . A call option on

the shares has a strike of $45 and a time value of $6.40 . If at expiry the

percentage change in shareprice is -6%, what is the rate of return on the call

option investment?

9. Today is Jan. 2, 2525, and the Company expects to receive from an

international subsidiary 2,000 krone in 3 months. The Company intends to

exchange the krone at the local bank.