One of the most important operating expenses

Assignment Help Operation Management

Reference no: EM13956145

One of the most important operating expenses for the Olde Virginia Brick Company is natural gas, which is used to bake and dry the bricks. Natural gas prices have recently been quite volatile, now approaching $6 per mcf. Olde Virginia is bidding on a contract for a large quantity of bricks to be provided for a new mall project that is under construction. The bricks must be delivered in 6 months. Olde Virginia has estimated that it can make a nice profit on the order at the current price of natural gas. If natural gas prices increase to $6.50 per mcf, Olde Virginia will just break even on the order. The 6 month futures contract price for natural gas is $5.75 per mcf. The cost of a call option to buy natural gas at $5.75 is $0.20 per mcf.

a. If Olde Virginia does not hedge the cost of its natural gas inputs, what is the expected cost of the gas to produce this large order?

b. If Olde Virginia hedges the cost of its natural gas inputs in the futures marke,t what is the expected cost of the gas for this order?

c. If Olde Virginia hedges the cost of its natural gas inputs by buying call options at a strike price of $5.75, what is the expected cost of the gas for this order?

d. Which strategy would you suggest and why?

Reference no: EM13956145

Questions Cloud

What is the beta of stock : Of the 10,000 invested in a two-stock portfolio, 40% is invested in stock A and 60% is invested in stock B. If stock A has a beta equal to 2.0 and the beta of the portfolio is 1.4, what is the beta of stock B? (Show work please!)

Portfolio equally invested in risk-free asset and two stocks : You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.53 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?

A project generates an operating cash flow : A project generates an operating cash flow of $20,000 each year. Initially, this 4 year project required $4,000 in net working capital. All working capital will be recouped at the end of the project. What is the cash flow from assets for year 4 of th..

What is the effective interest cost of this loan : Set up the amortization schedule for a five-year, $1 million, 9 percent term loan that requires equal annual end-of-year principal payments plus interest on the unamortized loan blaance. What is the effective interest cost of this loan?

One of the most important operating expenses : One of the most important operating expenses for the Olde Virginia Brick Company is natural gas, which is used to bake and dry the bricks. Natural gas prices have recently been quite volatile, now approaching $6 per mcf. If Olde Virginia does not hed..

What is net present value of this project at discount rate : Lakeside Winery is considering expanding its wine-making operations. The new equipment would cost $138,000, would be depreciated on a straight line basis over its 5-year life, and would have a zero value at the end of the 5th year. What is the net pr..

Calculate maximum mortgage amounts for conventional insured : You are considering the purchase of a $125,000 home with data as follows: Borrower data. You would like a fixed-rate, constant-payment 25-year mortgage. You are a VA and are eligible for a VA guaranteed mortgage, however you have used your VA guarant..

The total annual coupon income you will receive : You buy a TIPS at issue at par for $1,000. The bond has a 4.4% coupon. Inflation turns out to be 3.4%, 4.4%, and 5.4% over the next 3 years. The total annual coupon income you will receive in year 3 is _________.

Options contracts on the stock with a stock price : The price of a stock is $67. A trader sells 5 call options contracts on the stock with a stock price of $64 when the option price is $4. The options are exercised when the stock price is $65. What is the trader's net profit or loss? each contract rep..

User Account

All Pages