Question

In: Finance

•Acme Inc. makes widgets that include 1 oz. of platinum. The current spot price of platinum...

•Acme Inc. makes widgets that include 1 oz. of platinum. The current spot price of platinum is 1,440/oz. One widget will sell for 2,000 and has non platinum costs of 500 to produce (So, their profit function is P(x)= 2,000x – 500). The risk free rate is 4%. The widgets are to be made and sold at time 1. Calculate the unhedged and hedged profits at the end of one year if Acme sells all 100 widgets that they produce given the price of platinum one year from today is (a) 1,375/oz. (b) 1,475/oz. (c) 1,575/oz.

•For hedging with forwards use one year contracts with forward price of 1,450/oz.

•For hedging with options use one year call options with a strike price of 1,425/oz. with a premium of 30.00/oz.

Solutions

Expert Solution


Related Solutions

The current spot price of gold is $1,780 per ounce (oz.)
The current spot price of gold is $1,780 per ounce (oz.). Storing gold costs $12 per oz. per year, and the storage costs are paid when the gold is taken out of storage. The risk-free rate is 5% per annum (continuously compounded).i) What is the futures price for gold delivery in three-month?ii) If the current futures price for delivery of gold in three-month is $1810 per oz., identify a riskless arbitrage strategy
Suppose the gold spot price is $300/oz., the 1-year forward price is $310.686, and the continuously...
Suppose the gold spot price is $300/oz., the 1-year forward price is $310.686, and the continuously compounded risk-free rate is 5%. In class, we neglect the convenience yield for gold. In reality gold can may be lent and borrowed. Some entities operating in the wholesale gold market do lend gold and earn interest on such transactions. To sum up, there is a convenience yield for gold and it takes the name of “lease rate”. (a) What is the lease rate?...
The current spot price of Amazon stock is $1,823 the current 1-year forward price is $1,944....
The current spot price of Amazon stock is $1,823 the current 1-year forward price is $1,944. The current 1-year risk free rate is 6.5% per annum with semiannual compounding. If there is a $20 transaction fee for the combination of all transactions made, paid today, can you make an arbitrage profit with 100 shares? If there is an arbitrage how much would you make? Otherwise prove that there is not an arbitrage.
Acme Inc. manufactures widgets. This year was a great year with a increase in both sales...
Acme Inc. manufactures widgets. This year was a great year with a increase in both sales and production volume. In addition, the cost per unit dropped significantly from the prior year. These facts (probably) imply that: there are significant fixed costs in Acme's cost structure. None of these answers are correct cost of goods manufactured is relatively small in the current period. variable costs are a large percentage of cost of goods sold. total variable costs decreased in the current...
Assume the current spot price of a Bitcoin is $11,270 and the future price on a...
Assume the current spot price of a Bitcoin is $11,270 and the future price on a March 2018 contract is $11,420 per Bitcoin. You enter into 3 long future contracts today (1/29/18), and each contract is for 5 Bitcoins. Your initial margin is $5,000 per contract and your margin call occurs at $3,500 per contract. Date Price 1/29/18   11,310 1/30/18   11,460 1/31/18   11,600 2/1/18 11,410 2/2/18   11,150 2/5/18   10,900 2/6/18   10,990 2/7/18   10,790 What does your margin account have in...
Acme Company makes a product and produces a by-product. In the current month the costs in...
Acme Company makes a product and produces a by-product. In the current month the costs in the Mixing Department were: Materials          $80,000 Labor                $5,000 Overhead         $10,000 During the month 100,000 pounds of materials were processed. Of this, 90,000 of main product were transferred to the next department, and 10,000 pounds of by-product were recovered. The by product can be sold for .02 per pound. What is the journal entry to account for the by-product if they treat the market value...
Prices as shown on 20 Dec 2018 Apple Inc : Current spot price: $ 150   CALLS...
Prices as shown on 20 Dec 2018 Apple Inc : Current spot price: $ 150   CALLS PUTS Dec Jan Feb Strike Price Dec Jan Feb 5 8.85 - 149 2.67 6.6 7.93 4.25 8.35 9.65 150 3.15 7 8.38 2.97 7 7.95 152 4.2 8.1 9.5 1.88 5.83 7.36 155 5.85 9.3 10.64 11.1 Construct a profit/loss for a buyer of Jan Call at 155 strike price 11.2 Construct a profit/loss for a seller of Jan Call at 155 strike...
The current 1-year spot rate on a treasury bill is 4.25% and the current 1-year spot...
The current 1-year spot rate on a treasury bill is 4.25% and the current 1-year spot rate on a BB-rated bond of equivalent risk to a prospective loan is 11.55%. The bond has a marginal probability of default in year 2 of 8.5% 11. What is the marginal probability of default in year 1? (3 points) 12. What is the cumulative probability of default over the 2 years? (4 points)
The current price of platinum is $1,100 per ounce. The total storage costs are $36 per...
The current price of platinum is $1,100 per ounce. The total storage costs are $36 per ounce per year ($9) payable quarterly in advance. Assuming that interest rates are 5% per annum for all maturities, calculate the futures price of platinum for delivery in nine months.
1/ The Acme Company manufactures widgets. The distribution of widget weights is bell-shaped. The widget weights...
1/ The Acme Company manufactures widgets. The distribution of widget weights is bell-shaped. The widget weights have a mean of 63 ounces and a standard deviation of 6 ounces. Use the Standard Deviation Rule, also known as the Empirical Rule. Suggestion: sketch the distribution in order to answer these questions. a) 68% of the widget weights lie between  and b) What percentage of the widget weights lie between 45 and 69 ounces?  % c) What percentage of the widget weights lie above...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT