3 1 Suppose That In September 2015 A Company Takes A Long Position In A Contract On May 2016 Crude Oil Futures It Clo 1 (39.1 KiB) Viewed 55 times
3. 1) Suppose that in September 2015 a company takes a long position in a contract on May 2016 crude oil futures. It closes out its position in March 2016. The futures price (per barrel) is $88.30 when it enters into the contract, $90.50 when it closes out its position, and $89.10 at the end of December 2015. One contract is for the delivery of 1,000 barrels. (a) What is the company's total profit?
(b) When is it realized?
(c) How is it taxed if it is (i) a hedger and (ii) a speculator? Assume that the company has a December 31 year-end.
2) A company has a $20 million portfolio with a beta of 1.2. It would like to use futures contracts on a stock index to hedge its risk. The index futures is currently standing at 1080, and each contract is for delivery of $250 times the index
(a) How many contracts and what position that the company should enter to minimize risk? (b) What should the company do if it wants to reduce the beta of the portfolio to 0.6?
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.
Join a community of subject matter experts. Register for FREE to view solutions, replies, and use search function. Request answer by replying!