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107. What is the basic difference in strategy between buying and selling a futures contract?
108. Under what conditions can the use of options actually be detrimental to the firm's
profitability?
109. A soybean farmer anticipates the harvest of 10,000 bushels but is concerned about the
spot price that may exist at that time. He therefore sells two futures contracts (5,000 bushels
each, @ $14.75 per bushel). Unfortunately, the farmer was overly pessimistic, and the spot price
at contract expiration is $15.00 per bushel. Ignoring the premium paid, and making the simplifying
assumption that the contract was only held for one day, show the farmer's financial results of
hedging.
110. Discuss what it means for a futures contract to be marked to market. If you provide an
example, assume that the hedger has purchased a 5,000 bushel wheat contract at a price of
$6.90 per bushel.
111. What is the basic difference between hedgers and speculators?
112. There is perhaps a negative connotation about the term "speculators." Discuss the
essential purpose that speculators serve in providing the ability to hedge.
113. Discuss similarities and differences between futures contracts and forward contracts.
114. PAWS Inc., has structured a currency swap through its bank. PAWS intends to use the
funds to finance an expansion in its Irish operations. The terms are that PAWS will borrow $2
115. What is an interest rate swap, and what might motivate a borrower to arrange for one
with a bank?
116. Your firm has just tendered for a contract in Japan. You won't know for 3 months whether
you get the contract but if you do, you will receive a payment of 10 million yen a year from now.
You are worried that if the yen declines in value, the dollar value of this payment will be less than
you expect and the project could even show a loss. Discuss the possible ways that you could
protect the firm against a decline in the value of the yen. Illustrate the possible outcomes if you
do get the contract and if you don't.
117. Firms A and B face the following borrowing rates for a 5-year fixed-rate debt issue in U.S.
dollars or euros:
118. What do you think are the advantages of holding futures rather than the underlying
commodity? What do you think are the disadvantages?
