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Date Submitted: 06/01/2016 08:24 PM
Finance 4720 Class Homework #5 Solution Professor Joel Rentzler
1. (a) The elevator does not hedge.
(b) ( (tot) = (Sell - (Buy = 2.11 – 2.07 = 0.04
2. (a) Short hedges from Sept. 1 to Nov. 1
(b)
| | |SM |FM | |BASIS |
|Sept. 1 |Inventory |2.10 |2.34 |Sell |- 0.24 |
|Nov. 1 |Sell |2.11 |2.38 |Buy |- 0.27 |
| | |(2.21 - .10) | | | |
| |( (SM/FM) |+ 0.01 |-0.04 | |(B = - 0.03 |
(SH (TOT) = (SH (SM) + (SH (FM) = (St+1 - St) + (t FT – t+1 FT) = (S - (F
= + 0.01 - 0.04 = - 0.03
BASIS ( Bt = St – tFT and the Change is Basis ( (B = Bt+1 – Bt Thus:
(B = (St+1 - t+1 FT) – (St - t FT) = (St+1 - St) + (t FT – t+1 FT) = (S - (F
= (SH (tot)
SH loses $ when basis ( - Weakens – (i.e. when (B < 0)
SH makes $ when basis (- Strengthens – (i.e. when (B > 0)
Here the basis weakens & so SH loses money since (SH (tot) = (B = -0.03
3. (a) Long hedges from Sept. 1 to Nov 1
(b)
| | |SM |FM | |BASIS |
|Sept. 1 |Forward commit |2.12 |2.34 |Long |- 0.22 |
|Nov. 1 |Buys |2.13 |2.38 |Short |- 0.25 |
| |( (SM/FM) |- 0.01 |+ 0.04 | |(B = -...