Calculate the basis risk-loss on the futures position

Assignment Help Financial Management

Reference no: EM131450328

It is now Feb 1. NoRisk Inc. expects to buy 100 million ounces of silver at the beginning of May. Assume that Silver futures contracts have delivery months in April, June, and August (Assume delivery on the first day of the delivery month). Each contract is for the delivery of 25 million ounces. Assume that the futures price on CME for silver equals its theoretical price.Storage costs will be continuously incurred at a rate of 2% per annum. The continuously compounded risk-free rate is 10% per annum. Spot price of silver on Feb 1 is $10/oz. Spot prices at the future dates will be as follows (we do not obviously know these prices today):

April 1: $10.30/oz

May 1: $10.50/oz

June 1: $10.40/oz

July 1: $10.20/oz

Aug 1: $10.10/oz

(a) Should NoRisk Inc. go short or long on silver futures? How many contracts? Which delivery month?

(b) Calculate the basis risk (per contract).

(d) Calculate the effective price received by the company (per contract) at the beginning of May.

Reference no: EM131450328

Questions Cloud

What is the portfolios expected return : What is the portfolio's expected return?

Plan application pays benefit throughout development process : Carefully planning a new application pays benefits throughout the development process. Start with major roads between your point of origin and your destination.

Discuss some possible strategies for reducing the crime : As if you were a policy analyst for a criminal justice consortium, outline and discuss some possible strategies for reducing the crime of incest in this country

Calculate your percentage return on put option for six month : Calculate your percentage return on the put option for the six-month holding period if the stock price declines to $46 per share.

Calculate the basis risk-loss on the futures position : How many contracts? Which delivery month? Calculate the basis risk (per contract). Calculate the gain or loss on the futures position (per contract).

What are the popular products within the industry : MKT1100 Marketing Principles Assessment Tasks. What are the popular products within the industry - industry trends and who are consuming these products

Explain the rationale in terms of distinctiveness and size : Identify and describe a specific B2B niche segment for the DSO marketing team to focus on.

What are the legal implications and what laws were involved : Write a five-page report to the chief executive officer for the healthcare facility to assist him in gaining a better understanding of what occurred.

Describe any potential ethical issues that could arise : what type of architecture new payroll application should use and why. Explain any potential ethical issues that could arise in conncetion with new architecture.

User Account

All Pages