What is the expected cost of the gas for this order

Assignment Help Finance Basics
Reference no: EM131122277

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 I 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 market, 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: EM131122277

Questions Cloud

How information systems be used to support order fulfillment : Imagine you work for small used-bookstore. How could information systems be used to support order fulfillment? Within this system what is the most important information to capture?
A systematic sample having a single randomly selected : With a systematic sample having a single randomly selected starting point, the expansion estimator τˆ = Ny is design-unbiased for the population total τ , but no design-unbiased estimator of var(τ ) exists.
Single server system or multi channel server system : In either a single server system or a multi channel server system, what would be the arrival and waiting line characteristics for each of the following scenario: gas station (single server system), fast food drive (multiple server system), and highwa..
Record these transactions in a revenue journal : The state of Ohio has a 5.5% sales tax. Buckeye Services Inc., an Ohio company, had two revenue transactions as follows:
What is the expected cost of the gas for this order : 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? Which strategy would you suggest and why?
Why does morgan decide to finance the light bulb : Why does Morgan decide to finance the light bulb? How can he be so sure that it will be successful? Why is electricity a threat to Rockefeller?
Describe each transaction and the source : The debits and credits from two transactions are presented in the following supplier's (creditor's) account:
How are school rules similar to state and federal laws : How are school rules similar to state and federal laws? What would the typical American high school be like if there were no rules or consequences for breaking them
Explain benefits and challenges for implementation of iso : From the e-Activities, determine the key benefits and challenges for the implementation of ISO 9001:2008 standards for quality in manufacturing. Provide at least two examples from an industry where these standards have been applied successfully.

Reviews

Write a Review

Finance Basics Questions & Answers

  Capital budgeting and dividend policy

Examine two very important topics in Finance this week. Capital Budgeting and Dividend Policy.

  What is the effective annual rate of the discount

A supplier grants your firm credit terms of 2/10, net 30. What is the effective annual rate of the discount if the firm purchases $1,850 worth of merchandise?

  You have 4629802 in a brokerage account and you plan to

you have 46298.02 in a brokerage account and you plan to deposit an additional 5500 at the end of every future year

  The goal of financial management is to increase the

The goal of financial management is to increase the

  What is the price of the bond

What is the price of the bond?

  Analysis of elf corporation profit performance

Income statements are presented in the table below for the Elf Corporation for the years ending December 31, 2010, 2009, and 2008. Write a one-paragraph analysis of Elf Corporation's profit performance for the period.

  Calculate the standard deviation of returns

You are thinking an investment in either individual stocks or a portfolio of stocks. The two (2) stocks you are researching, stocks A & B, have the following historical returns;

  Assume that you would normally not carry any bank balance

1. community hospital has annual net patient revenues of 150 million. at the present time payments received by the

  Suppose you can borrow 10 million or its yen equivalent

forward premium discount and interest rates differentialyen pound speseta1-month forward 5.45.7 -1.9-1.9 1.21.23-months

  What is the profitability index of the project

Suppose Conch Republic loses sales on other models because of the introduction of the new model. How would this affect your analysis?

  Question regarding the corporate bond spreads

Assess today's risk premium on industrial bonds using the Bonds Online Web site. Select the Today's Market section and then choose Corporate Bond Spreads. Use the information in this area to answer the following questions:

  Japan life insurance company invested 10000000 in

japan life insurance company invested 10000000 in pure-discount u.s. bonds in may 1995 when the exchange rate was 80

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd