Get premium membership and access questions with answers, video lessons as well as revision papers.

Maendeleo Industries is concerned about interest rates rising. It needs to borrow in the bond market three months hence. The company believes that an option on...

      

Maendeleo Industries is concerned about interest rates rising. It needs to borrow in the bond market
three months hence. The company believes that an option on treasury bond futures is the best
hedging device.
i) Should the company buy a put option or a call option? Explain.
ii) Presently, the futures contract trades at Sh.1,000 and 3 month put and call options
both involve premiums of 1½ per cent based on this strike price. During the 3 months,
interest rates rise, so that the price on a treasury bond futures contract goes to Sh.950. What
is your gain or loss on the option per Sh.1,000,000 contract?

  

Answers


Kavungya
fig11164514.png
Kavungya answered the question on April 16, 2021 at 14:15


Next: Futures contracts and options on futures contracts can be used to modify risk. Required: Identify the fundamental distinction between a futures contract and an option on a...
Previous: Gome Drug Products Ltd. (GDPL) is faced with several possible investment projects. For each, the total cash outflows required will occur in the initial period. The...

View More CPA Advanced Financial Management Questions and Answers | Return to Questions Index


Learn High School English on YouTube

Related Questions