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FIN 370 Week 5 My Finance Lab

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Question;FIN 370 Week 5 My;Finance Lab;Problem 1(Hedging with forward contracts);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 firm's analysts estimate that;Specialty will need to purchase 1 million barrels of crude oil at the end of;the current year to provide the feed stock for its refining needs for the;coming year. One million barrels of crude will be converted into by-products at;an average cost of $10 per barrel that Specialty expects to sell for $185;million, or $185 per barrel of crude used. The current spot price of oil is;$130 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 $135 per barrel.;a.;Ignoring;taxes, what will Specialty's profits be if oil prices in one year are as low as;$115 or as high as $155, assuming that the firm does not enter into the forward;contract?;b.;If;the firm were to enter into the forward contract, demonstrate how this would;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.;Problem 2 (Fill in the Blank);Because????..;to post margin when they enter into a future contract and because they mark to;market???????, we are ????.the party and the counterparty to the contract have;already posted the gain or loss to the other and the risk of default ????;Problem 3(Construct a Graph);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?;Problem 6(Construct a Graph);Construct;a delivery date profit or loss graph 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;a. Which;of these graphs shows the correct profit/loss line for the long forward;contract on delivery date T

 

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