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FIN 370 WEEK 5 MY Finance Lab

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Question;FIN 370 WEEK 5 MY Finance;Lab;1. Construct a;delivery date profit or loss raph for a long position in a forward contract;with a delivery price of $75.00. Analyze the profit or loss for values of the;underlying asset ranging from $55 to $100 (I attached the graphs) a. Which of;these graphs shows the correct profit/loss line for the long forward contract;on delivery date T? A. Graph C B. Graph D C. Graph A D. Graph B;2. The specialty chemical Company;operates a crude oil refinery located in New Iberia, LA. The company refines;crude oil and sells the by-products to companies that make plastic bottles and;jugs. The firm is currently planning for its refining needs for one year hence.;Specifically, the firms analysts estimate that specialty will need to purchase;1 million barrels of crude oil at the end of of the current year to provide the;feed stock for its refining needs for the coming year. The 1 million barrels of;crude oil will be converted into by products at an average cost of $15 per;barrel that Specialty expects to sell for $175 million, or $175 per barrel of;crude used. The current spot price of oil is $120 per barrel and Specialty has;been offered a forward contract by its investment banker to purchase the needed;oil for a delivery price in one year of $125 per barrel.;A. Ignoring;taxes, what will Specialty's profits be if oil prices in one year are as low as;$105 or as high as $145, assuming that the firm does not enter into the forward;contract?;A.;Ignoring taxes, what will specialty's profits be if oil prices in one year are;as low as $100 or as high as $140, assuming that the firm does not enter into;forward contract? Round to the nearest dollar.;B. If;the firm were to enter into forward contract, demonstrate how this would be;effectively lock in the firm's cost of fuel today, thus hedging the risk of;fluctuating crude oil prices on the firm's profits for the next year.;3.Discuss how the exchange requirements that mandate;traders to put up collateral in the form of a margin requirement and to use this;account to mark their profits or losses for the day, serve to eliminate credit;or default risk. (fill in the blank to make the following sentence true;Because ____________________(both parities have) or (no;parties have) to post margin when they enter into a futures contract and;because they mark to market ____________ (on the delivery date) or (every day;until the delivery date), we are __________ (assure) or (not assured) the;party and the counter party to the contract have already posted the gain or loss;to the other and the risk of default _____________ (is thereby negated) or;(still exists).;4.Construct a;delivery date profit or loss graph for a short position in a forward contract;with a delivery price of $60. Analyze the profit or loss for values of the;underlying asset ranging from $40 to $80.;Which of these graphs shows the correct profit/loss line for;the short forward contract on the delivery date T?;Graph C;Graph B;Graph D;Graph A

 

Paper#47588 | Written in 18-Jul-2015

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