# Question: Suppose you know nothing about widgets You are going to

Suppose you know nothing about widgets. You are going to approach a widget merchant to borrow one in order to short-sell it. (That is, you will take physical possession of the widget, sell it, and return a widget at time T .) Before you ring the doorbell, you want to make a judgment about what you think is a reasonable lease rate for the widget. Think about the following possible scenarios.

a. Suppose that widgets do not deteriorate over time, are costless to store, and are always produced, although production quantity can be varied. Demand is constant over time. Knowing nothing else, what lease rate might you face?

b. Suppose everything is the same as in (a) except that demand for widgets varies seasonally.

c. Suppose everything is the same as in (a) except that demand for widgets varies seasonally and the rate of production cannot be adjusted. Consider how seasonality and the horizon of your short-sale interact with the lease rate.

d. Suppose everything is the same as in (a) except that demand is constant over time and production is seasonal. Consider how production seasonality and the horizon of your short-sale interact with the lease rate.

e. Suppose that widgets cannot be stored. How does this affect your answers to the previous questions?

a. Suppose that widgets do not deteriorate over time, are costless to store, and are always produced, although production quantity can be varied. Demand is constant over time. Knowing nothing else, what lease rate might you face?

b. Suppose everything is the same as in (a) except that demand for widgets varies seasonally.

c. Suppose everything is the same as in (a) except that demand for widgets varies seasonally and the rate of production cannot be adjusted. Consider how seasonality and the horizon of your short-sale interact with the lease rate.

d. Suppose everything is the same as in (a) except that demand is constant over time and production is seasonal. Consider how production seasonality and the horizon of your short-sale interact with the lease rate.

e. Suppose that widgets cannot be stored. How does this affect your answers to the previous questions?

**View Solution:**## Answer to relevant Questions

The current price of oil is $32.00 per barrel. Forward prices for 3, 6, 9, and 12 months are $31.37, $30.75, $30.14, and $29.54. Assuming a 2% continuously compounded annual risk-free rate, what is the annualized lease rate ...a. Suppose that you want to borrow a widget beginning in December of Year 0 and ending in March of Year 1. What payment will be required to make the transaction fair to both parties? b. Suppose that you want to borrow a ...Using the information in Table 7.1, suppose you buy a 3-year par coupon bond and hold it for 2 years, after which time you sell it. Assume that interest rates are certain not to change and that you reinvest the coupon ...Compute Macaulay and modified durations for the following bonds: a. A 5-year bond paying annual coupons of 4.432% and selling at par. b. An 8-year bond paying semiannual coupons with a coupon rate of 8% and a yield of 7%. c. ...Suppose you observe the following par coupon bond yields: 0.03000 (1-year), 0.03491 (2-year), 0.03974 (3-year), 0.04629 (4-year), 0.05174 (5-year). For each maturity year compute the zero-coupon bond prices, effective annual ...Post your question