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The Theory and Practice of Investment Management - Essay Example
Finance & Accounting
Pages 11 (2761 words)
Question1 2 Part 1 2 Part 2 2 Part 3 3 Question 2 4 Question 3 6 Question 4 9 Part B chosen 9 Reference List 12 Question1 Part 1 I. The company must choose the contract March 2013 in order to hedge its exposure. Usually, it is recommended that the hedge instrument to have a maturity greater with at least one month than the hedged asset…
The computations are shown in the following table. Table no.1 Number of contracts necessary to be hedged Contract Amount $ 7,500,000.00 Hedge Ratio 0.5 Price 97 No of contracts 38660 Part 2 I. In order to close the position, the company should buy futures contracts for March 2013, at the price 97.6. II. The transaction on the futures market brought a loss equal to: no of contracts *(selling price-buying price). The computations are shown in the following table. Table no.2 Final position from the futures transaction Price (short position) 97 Price (long position) 97.6 No of contracts 38660 Loss $ - 23,195.88 Part 3 I. The relationship between the price of the future contract and the interest rates on the market is an inverse relationship. So, for this example, the price of the future contract has raised implying a decline in the interest rate. II. The company has fixed its borrowing cost only for 50% of the exposure. The effective borrowing cost is computed as: r= 100- 97= 3% So, the company will borrow money at 3%. III. The company did not hedge all the risks involved by the transaction above. Firstly, it only hedged 50% of its interest rate exposure. Secondly, risks related to changes in the principal borrowed, or the currency in which this one is expressed are not hedged. Question 2 There are various theories related to dividend policies. ...
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