Assume that you are running an Australia based company which has an account payable of EUR...
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Assume that you are running an Australia based company which has an account payable of EUR 125,000 due in three months. You decide to hedge out the associated foreign exchange risk using futures contracts. A futures contract of EUR125,000 is selling at A$1.5410 per euro. Suppose the next three days' settlement prices are A$1.5399, A$1.5480, and A$1.5410. The initial margin of your performance bond account is $2,000 and maintenance margin is $1,500. What is your margin account balance at the end of the first day and what is the balance of this account at the end of the third day? (4 marks) b) The standard deviation of monthly changes in the spot price of iron ore is (in USD per metric tonne) 25.2. The standard deviation of monthly changes in the futures price of iron ore for the closest contract is 28. The correlation between the futures price changes and the spot price changes is 0.8. It is now 15 October. BHP is committed to delivering 10,000 metric tonnes of iron ores on 5 January. The company wants to use the January iron ore futures contracts to hedge its risk. Each contract is for the delivery of 1200 metric tonnes of iron ores. What position should the company take in the futures contract and how many contracts should the company purchase/sell? (4 marks) c) A Germany company expects to receive 1 million US dollars in six months. What is the company's risk exposure and what type of option contracts can help hedge this exchange risk? (2 marks) Assume that you are running an Australia based company which has an account payable of EUR 125,000 due in three months. You decide to hedge out the associated foreign exchange risk using futures contracts. A futures contract of EUR125,000 is selling at A$1.5410 per euro. Suppose the next three days' settlement prices are A$1.5399, A$1.5480, and A$1.5410. The initial margin of your performance bond account is $2,000 and maintenance margin is $1,500. What is your margin account balance at the end of the first day and what is the balance of this account at the end of the third day? (4 marks) b) The standard deviation of monthly changes in the spot price of iron ore is (in USD per metric tonne) 25.2. The standard deviation of monthly changes in the futures price of iron ore for the closest contract is 28. The correlation between the futures price changes and the spot price changes is 0.8. It is now 15 October. BHP is committed to delivering 10,000 metric tonnes of iron ores on 5 January. The company wants to use the January iron ore futures contracts to hedge its risk. Each contract is for the delivery of 1200 metric tonnes of iron ores. What position should the company take in the futures contract and how many contracts should the company purchase/sell? (4 marks) c) A Germany company expects to receive 1 million US dollars in six months. What is the company's risk exposure and what type of option contracts can help hedge this exchange risk? (2 marks)
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Answer rating: 100% (QA)
a To calculate the margin account balance we need to consider the daily settlement prices and the margin requirements Initial margin 2000 Maintenance ... View the full answer
Related Book For
Financial Reporting And Analysis
ISBN: 9781260247848
8th Edition
Authors: Lawrence Revsine, Daniel Collins, Bruce Johnson, Fred Mittelstaedt, Leonard Soffer
Posted Date:
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