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For the following scenarios, describe a hedging strategy using futures contracts. Discuss the reasons for your choice of contract.
a. A bank derives all its income from long-term, fixed-rate residential mortgages.
b. A stock mutual fund invests in large, blue-chip stocks and is concerned about a decline in the stock market.
c. A U.S. exporter of construction equipment has agreed to sell some cranes to a German construction firm. The U.S. firm will be paid in euros in three months.
Finally, comment on whether using option contracts in the above cases could be better. What are the pros and cons of using options?
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Rashid Singh, the president of Surf-Side Beer Distributors of Salina, Kansas, has decided that his firm must acquire a new machine that costs $800,000. The firm’s corporate borrowing rate is 12%, The machine can be leased for $110,000 per year for it..
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An investor antipates that Apple stock will go up and buys a call option for $2 with a stike price of $120 expires on 10/2016. If he early exercises this call in September, what will be the payoff in September? At what Apple price in September will h..
The expected net cash flow for year 1 is $50,000.- What is the probability that year 1 net cash flows will be negative?
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