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Fin370 Week Five Lab Problems

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Question;Fin370 Wee Five Lab Problems;1. Construct a delivery date profit or loss;graph for a long position in a forward contract with a delivery price of $80.;Analyze the profit or loss for values of the underlying asset ranging from $50;to $105.;a.;Which graph shows the correct profit/loss line for the long forward contract on;the delivery date T?;2. Construct a delivery date profit or loss;graph for a short position in a forward contract with a delivery price of $80.;Analyze the profit or loss for values of the underlying asset ranging from $50;to $105.;a.;Which graph shows the correct profit/loss line for the long forward contract on;the delivery date T?;3. The;Specialty chemical company operates a crude oil refinery located in New Iberia;LA. The company refines crude oil and sells the byproducts 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;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;byproducts at an everage cost of $10 per barrel that Specialty expects to sell;for $185 million, or $185 per barrel of crude oil 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 a 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 a;forward contract?;i.;Price of oil/bbl Unhedged annual profits;1. 115;?;2. 120;?;3. 125;?;4.;Etc, 130, 135, 140, 145, 150, 155;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 firms profits for the next year.;4.;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.;Because;(neither party has, or both parties have?) to post when they enter into a;futures contract and because they mark to market (on the delivery date, every;day until the delivery date?), we are (assured, not assured?) the party and the;counterparty to the contract have already posted the gain or loss to the other;and the risk of default (still exist, is thereby negated?).

 

Paper#50100 | Written in 18-Jul-2015

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