Reference no: EM131354445
Not long ago, Vanessa Woods sold her company for several million dollars. She took some of that money and put it into the stock market. Today Vanessa’s portfolio of blue-chip stocks is worth $3.8 million. Vanessa wants to keep her portfolio intact, but she’s concerned about a developing weakness in the market for blue chips. She decides, therefore, to hedge her position with six-mount futures contracts on the Dow Jones Industrial Average which hare currently trading at 11,960.
a) Why would she choose to hedge her portfolio with the DJIA rather than the S&P 500?
b) Given that Vanessa wants to cover the full $3.8 million in her portfolio, describe how she would go about setting up this hedge.
c) If each contract required a margin deposit of $4,875, how much money would she need to set up this hedge?
d) Assume that over the next six months, stock prices do fall, and the value of Vanessa's portfolio drops to $3.3 million. If DJIA futures contracts are trading at 10,400, how much will she make (or lose) on the future hedge? Is it enough to offset the loss in her portfolio? That is, what is her net profit or loss on the hedge?
e) Will she now get her margin deposit back, or is that a "sunk cost"--gone forever?
|
What rate of return will be earned by investor
: bond that pays coupons annually is issued with a coupon rate of 4.1%, maturity of 25 years, and a yield to maturity of 7.1%. What rate of return will be earned by an investor who purchases the bond and holds it for 1 year if the bond’s yield to matur..
|
|
Assume interest is compounded monthly
: Sam promises to pay Sandy $2,500 in four years and another $3,200 four years later for a loan of $2,500 from Sandy today. What is the monthly interest rate that Sandy is getting? Assume interest is compounded monthly.
|
|
What is the marginal cost of deposits if this bank raises
: A bank expects to raise $30 million in new money if it pays a deposit rate of 7%. It can raise $60 million in new money if it pays a deposit rate of 7.5%. It can raise $80 million in new money if it pays a deposit rate of 8% and $100 million in new m..
|
|
Consider four-year inflation indexed bond
: Consider a four-year inflation indexed bond. The bond indexes the par value to inflation, such that it increases based on realized inflation over the year. The bond pays fixed annual coupon payments of 4.5% of the modified par value as well as the mo..
|
|
Describe how she would go about setting up this hedge
: Not long ago, Vanessa Woods sold her company for several million dollars. She took some of that money and put it into the stock market. Today Vanessa’s portfolio of blue-chip stocks is worth $3.8 million. Why would she choose to hedge her portfolio w..
|
|
Describe firm that used debt instead of stock
: Describe a firm that used debt instead of stock or vice versa to raise new capital. What was the result? How was the decision interpreted by shareholders?
|
|
How much will she owe just after her payment
: When Maria Acosta bought a car 2.5 years ago, she borrowed $10,000 for 48 months at 7.2% compounded monthly. Her monthly payments are $240.39, but she'd like to pay off the loan early. How much will she owe just after her payment at the 2.5-year mark..
|
|
Component cost of debt for use in wacc calculation
: Several years ago the Jakob Company sold a $1,000 par value, noncallable bond that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $950, and the company's tax rate is 40%. What is the com..
|
|
What is best estimate of stock current market value
: Nachman Industries just paid a dividend of D_0 = $1.75. Analysts expect the company's dividend to grow by 30% this year, by 10% in Tear 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. Wha..
|