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FIN 370 WEEK 5 MY Finance Lab

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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#73831 | Written in 18-Jul-2015

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