Please help me with the following.
This is for a mock portfolio. I need help in determining what is the best strategy for each one. Please explain why for each strategy that you feel is appropriate.
5. Texas Aviation, major Dallas/Fort Worth area flight school, plans to hedge its jet fuel purchases using ultra-low diesel fuel contracts using cross-hedging, as there are no direct jet fuel futures contracts available. Texas Aviation will be hedging on a quarterly basis and the next purchases are planned for mid April. The school’s primary business involves training pilots who need to get a type-rating for light jets. Additionally, the flight school rents out its planes as available. The flight school’s six jets are anticipated burn a total of 825,000 gallons of jet fuel per quarter.
determine the appropriate minimum variance hedge ratio the flight school needs and enter into the appropriate futures contract.
Hints, you will need to determine the minimum variance hedge ratio, which requires the following as inputs:
· ρ Correlation coefficient for the spot and futures commodities
· α(s) Standard deviation for the spot commodity
· α(F) Standard deviation for the futures commodity
· Q(A) Size of the position being hedged (how much propane do you need)
· Q(F) Size of one futures contract (what is the size of each heating oil futures contract)
Ultra low diesel oil futures are for 42,000 gallons and are quoted in US dollars and cents per gallon [ CME Group – Heating oil futures ]
Note: ULSD was formerly under “Heating Oil”, and this designation may be indicated in StockTrak. Use Petroleum/Heating Oil, you should then see NY Harbor ULSD as the specific contract. You should use an April futures contract.
6. A major (multi-state) car dealer wants to feature the Mercedes-Benz E-Class cars for a mid April promotion. The dealer has ordered 200 of these shiny new cars at a price of 38,000 Euros each and the full payment is due in early April. Construct a strategy using June futures such that the dealer can develop his pricing strategy and promotion now. In other words, price-risk is not an option for the dealer.
7. Apple has decided that it will repatriate 13mm Yen from the Japan in time for their April 15 financials in order to boost their available US cash reserves. Because of the tax consequences involved in the cash repatriation, the CFO does not want any unpleasant surprises in April when they repatriate the funds due to currency fluctuations. Construct a position using June futures that will minimize Apple’s currency exposure. Each contact is for 1.25mm yen. Note that it is better to under-hedge rather than over-hedge (i.e., leave some yen unhedged).
8. You feel like taking chances. Research a stock that you think will either stay the same, increase very little or decline in price; write a naked call. Think about how much the stock price might increase before you start to lose money based on the current stock price. Review the definition of a naked call and be sure you both required elements in your portfolio.
9. Research a stock that you think will decrease in price. Create a covered call for (at least) 100 shares of stock designed to create a profit for your portfolio (don’t forget to purchase the underlying stock before you execute your option strategy). In theory with a covered call: You would own a stock for a while (several months, a year, whatever), and then decide that for some reason the stock is about to lose money in the market. You are willing to part with the stock at this point and you have decided that X (the exercise price of the call) is a price at which you would be willing to sell the stock. The call premium is additional income from this strategy. You wouldn’t ever pick a stock that you think will lose money, buy it and then sell a call on it. That means, buy a stock and immediately think of it as one that you have held for a while.
10. Research a stock that you think will decrease in price, create a bear put spread for at least 100 shares of stock.
11. Research a stock you think might have a jump in the stock price, you don’t know the direction however – could be up, could be down. Develop a straddle strategy that might profit from this price change. Note that the option transactions may need to be executed as two separate transactions.
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