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The MakeStuff Company’s earnings stream is highly dependent on the cost of a key commodity input Management believes taxable earnings will be

The MakeStuff Company’s earnings stream is highly dependent on the cost of a key commodity input. Management believes taxable earnings will be $100,000 if the input price is low, taxable earnings will be $50,000 if the input price is at a moderate level, but earnings will be zero if the input price is high. Management sees these outcomes as being equally likely. The company pays a 15% tax rate on the first $50,000 of taxable earnings, and a 25% rate on all earnings above $50,000.

 

13.What is MakeStuff’s tax liability if the input price is at the moderate level?

a.$7500

b.$10,000

c.$12,500

d.none of the above

 

 

 

14.What is MakeStuff’s expected after tax earnings if it remains unhedged?

a.$50,000

b.$42,500

c.$80,000

d.$40,833

 

 

 

15.What is MakeStuff’s after-tax earnings if it can lock in the moderate price level for sure?

a.$50,000

b.$42,500

c.$80,000

d.$40,333

 

 

 

CBOE

Use the following information on CBOE 13-week T-bill rate options to answer the following question(s).

 

Strike Level  OCT Call OCT Put

301.500.75

351.201.10

401.001.40

 

 

16.Refer to CBOE. Suppose you want to cap your interest rate before a planned October borrowing. What is the cost of using the OCT 35 option to hedge?

a.$110 per contract

b.$1.10 per contract

c.$120 per contract

d.$1.20 per contract

 

 

 

17.Refer to CBOE. If you used the OCT 35 option to hedge rising rates, and the yield to maturity (YTM) on 13-week bills is 3.75 percent at the option’s expiration, what is the outcome of your hedge?

a.profit of $250 per contract

b.profit of $130 per contract

c.loss of $120 per contract

d.no gain or loss, the option expires worthless

 

 

 

18.Refer to CBOE. What is the cost of the least expensive floor to protect from falling interest rates?

a.$75 per contract

b.$0.75 per contract

c.$100 per contract

d.$1.00 per contract

 

 

 

19.Refer to CBOE. Suppose you want to construct a collar to reduce the cost of the cap by selling a floor. What is the net cost of the least expensive such collar? (Be sure the strike prices on the call and the put are NOT the same)

a.$0.10 per contract outflow

b.$10 per contract outflow

c.$0.10 per contract inflow

d.$10 per contract inflow

 

 

 

20.Suppose the spot exchange rate is 0.5491 pounds per U.S. dollar, while the risk-free borrowing rate is 4% in Britain. If the “fair” exchange rate is 0.5544 pounds per U.S. dollar, what is the risk-free borrowing rate in the United States?

a.5%

b.4%

c.3%

d.2%

 

 

 

21.Suppose the spot exchange rate is 0.5491 pounds per U.S. dollar, while the risk-free borrowing rates are 4% in Britain and 3% in the United States. If the current forward exchange rate is also 0.5491 pounds per dollar, what opportunity exists?

a.Arbitrage by borrowing in Britain today, and selling pounds forward.

b.Arbitrage by borrowing in Britain today, and selling dollars forward.

c.Arbitrage by borrowing in the United States today, and selling pounds forward.

d.Arbitrage by borrowing in the United States today and selling dollars forward.

 

 

 

22.Snooty Wine Importers has an order of exclusive Chateau de Snoot wines arriving from France in October, and the order will be paid in euros. Which of the following will hedge the importer’s currency exposure?

a.buy euros forward

b.sell euros forward

c.sell dollars forward

d.sell wine futures

Feb 13 2020 View more View Less

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