1. It is March 2017. You are a mining firm, and you will have 200,000 ounces of gold ready for sale in September 2017. You decide to hedge October 2017 gold futures contract.
Questions
1a. Compute a hedge ratio, using the daily data.
1b. What is the size of the hedge, using daily data? (100 ounces per contract)
2a. Compute a hedge ratio, using the weekly data.
2b. What is the size of the hedge, using weekly data?
3a. Should we take the hedge?
3b. Why or why not?
NOTE: Daily and weekly data will be provided later. Please use excel solving this problem & post it with the formula sheet, not just the numbers. Thank you
2. A company has issued floating-rate notes with a maturity of one year, an interest rate of LIBOR plus 125 basis points, and total face value of $50 million.
The company now believes that interest rates will rise and wishes to protect itself by entering into an interest rate swap. A dealer provides a quote on a swap in which the company will pay a fixed rate 6.5 percent and receive LIBOR. Interest is paid quarterly, and the current LIBOR is 5 percent. Show all your calculations and explain in details.
(a) Indicate how the company can use a swap to convert the debt to a fixed rate.
(b)Calculate the first payment made by the company. Assume that all payments will be made on the basis of 90/360