澳洲代写 Solution Lease Rates calculation

  • 100%原创包过,高质量代写&免费提供Turnitin报告--24小时客服QQ&微信:273427
  • Question 1 –Solution:
    Among different kinds of financing methods, usually, collateralized financing is with relatively low interest rate. In collateralized financing contract, the borrowerpledge specific property to a lender, to secure repayment of the loan. In collateralized financing, the collateral performs as secure for a lender against a borrower's default. That is to say, if the borrower fails to pay back the principle and interest of the loan and does default on a loan, the lender has the right to require the borrower to transfer the ownership the collateral to himself. A typical and common exampleof the collateralized financing is mortgage loan. In this lending agreement, the real estate serves as collateral. If the borrower fails to pay back the loan and defaults on the mortgage loan, as an alternative, the bank can gainthe ownership of the real estate is transferred to the bank by legal process called foreclosure. So compared with other financing methods, collateralized financing contract is safer for lenders. The lenders bear less default risk. And as a saying goes “low risk, low return”, collateralized financing contract usually pays relatively lower interest rate. Those risk adverse lenders are willing to lend a companyusing this form of collateralized financing contract at lower interest rates. However, it doesn’t mean there is completely no credit risk for lenders in collateralized financing contract. The decrease of the collateral’s value, some unexpected events and so on all can generate credit risks. Also using mortgage loan as an example, the value of collateral reduces when the price of real estate goes down. If the value of the real estate is lower than the loan, when the borrower fails to pay back the loan, even if the bank can gain the ownership of real estate, the bank still bears a loss. At the same time, the education level of borrowers also influences the level of credit risk.
     
    Question 2-Solution:
    As a manufacturing company, we usually need a large amount of fund to support our projects. Usually we raise external capital by either debt financing or equity financing. And as we know, external debts don’t have effects on our shares. More importantly, the interest of debts can be regarded as expenses deducted from income before tax. Therefore, debt financing has tax advantages compared with equity financing. Among different debt financing methods, collateralized financing activities are with lower interest rate, which is optimal choice for long-term borrowing. Company can reduce financing costs by using collateralized financing activities. In addition, according to these articles I found, currently, copper inventory is beingused as collateral for a financing transaction, which will influence the copper price around the world. So as a treasureof a Chinese manufacturer, I had to learn the effect of collateralized financing activities,what are the credit risks inherent in the collateralized financing contract and how will it influence the capital structure of company.
     
    Question 3-Solution:
    Profit of a company is also called net income, which is equal to the revenue minus the costs. It is one of the most important financial indicators; it measures the profitability which the owner cares most in theproduction process. Also, a small volatility of the company’s profits also has many meanings. Firstly, from the perspective of investors, investors feel safer to invest in the companies with stable profits. A stable profit, to some degree, implies smaller risks and good performance, further implies higher market value of the company in the future. As a result, the stocks of the companies with stable profits are more attractive to investors. Secondly, for the managers, stable profits can provide effective time series data to predict the company’s profits in next periods. It can help CEO make better budgeting and management strategies. Thirdly, Gordon(1964) put forward some assumptions: (a) the major purposes of senior managers’ decisions are to raise their own wealth. (b) Senior manager’s income and promotion depends on the growth of the company and the satisfaction of shareholders. (c) And the profit is higher and more stable, the shareholders are more satisfactory. Thus, considering all factors above, CEO of the company is interested in reducing the volatility of the company’s profits. In reality, senior managers in many famous enterprises like Microsoft have ever kept profit stable through income smoothing.
     
    Question 4-Solution:
    The background mentions our company’s product use a large amount of copper as input. So only considering copper as a source of volatility of profit, when the price of copper increases, the company’s profits will goes down, on the contrary, when copper’s price declines, the company generates more profits or occupy more market share. So in order to reduce the volatility of profit, we need to take actions to keep the price of copper purchased stable. There are several hedging alternatives may be available tothe company to reduce the risks it faces. The first one is hedging by a bought forward contract. By this way, for example, we plan to purchasecopper 1 year later at theprevailing spot price of copper. To avoid the hurts from a rising copper price, we can use a forward contract to purchase its copper in 1 year at the forward price of $3.50/LB. The second one is hedging with a call option. Through buying a call option with a strike price of $3.50/LB, we have the right,but are not obligated, to purchase its copper in 1 year at the strikeprice of $3.50/LB. This right is not free; we usually pay an option premium for it. Also, we can insure it by selling a call option, which can decrease losses through a premium, simultaneously, use collar strategies. The third one is hedging with future contract. We can buy future contracts of copper to hedge against the risk of a rising price of copper.
     
    Then, let’s come to a harder questionthatwhich of the above hedging methods we shouldchoose.Firstly, we need to consider whether there is production uncertainty or not. Usually, we hedge based on an expected production. But if due to some influential factors, we can’t expect the future production, we had better hedge with a call option, which gives us right, but no obligation to trade at strike price in the future. Secondly, the utilization of funds should be considered. Future transactions need trade margin, so hedging with future contacts will decrease the utilization of funds. But future trading is pretty convenient, flexible and low cost compared with other hedging strategies. For our company, based on the data of previous years, we can estimate the demanded amount of copper each year, so hedging with future contracts may be a good approach for protecting against the rise in price of copper.
     
    Q5-Solution:
    The natural buyers of SHFE copper futures contract could be those firms and individuals who use copper as an important input in their businesses. They need buy the copper futures contract to transfer the risks of rising price of copper to other parties who would like to assume this risk. And the natural sellers of SHFE copper future contract usually are those firms and individuals who face the opposite financial risks, in this case, the natural seller could be factories producing and selling copper cathode. Also, sometimes market makers or speculators can be the seller of SHFE copper future contracts. By the use of future contract, companies can transfer undesired risks to other parties and take the risks they desire.
     
    Q6-Solution:
    Simply speaking, the reason is thatSHFE copper futures contract can bring profits for speculators and other participants.In future market, in addition to hedgers, there are many speculators who are interested in theSHFE copper futures contract. The purpose of their trading in future market is not to protect themselves from the risks of the changeable copper price, but to attempt to utilize the price fluctuations to make huge profit through “ buy at low price and sell at high price”. So they tend to do the short-term future transactions with little spread and large volume. Also, market makers are also the participant of future market, who isobligated to maintain the stability and prosperity of the market. And they trade with the buyers and sellers of the SHFE copper future contracts at the same time, and gain the spreads.
     
    Q7-Solution:
    To calculate the per annum lease rate of the SHFE copper futures contract, the future pricing model on commodity need be used. The forward price on commodity is denoted by:
    F0, T = S0e (r−δ)T
    In this model, δ denotes lease rate, which measures the net benefits from owning the asset. It can be calculated through the formula deformed.
    δ= r – 1/Tln (F0, T/S0)
    In this case, the expiration time of eachSHFE copper future contract is determined by its listing date, and we use SHIBOR rates with different maturities as r. S0is equal to 46150.
    Table I. Lease Rates of SHFE copper future contracts

    Lease Rates calculation
    Contract Future price Spot price R T*12 Listing date lease rate
    cu1501 45,690 46,150 4.5949 11 2014/1/16 4.6058
    cu1502 45,230 46,150 4.5312 10 2014/2/18 4.5553
    cu1503 44,960 46,150 4.4920 9 2014/3/18 4.5268
    cu1504 44,790 46,150 4.4037 8 2014/4/16 4.4486
    cu1505 44,670 46,150 4.3048 7 2014/5/16 4.3607
    cu1506 44,600 46,150 4.3467 6 2014/6/17 4.4150
    cu1507 44,560 46,150 4.3455 5 2014/7/16 4.4296
    cu1508 44,450 46,150 4.1489 4 2014/8/18 4.2614
    cu1509 44,470 46,150 4.1952 3 2014/9/16 4.3435
    cu1510 44,410 46,150 4.1971 2 2014/10/16 4.4276
    cu1511 44,240 46,150 4.1989 1 2014/11/18 4.7061
    As we mentioned, lease rate measures the net benefits (convenience yield –storage costs) of the ownership of the copper. Thus, according to the calculating results above, the SHFE copper future contact cu1511 has the highest lease rates, and the contact cu1508 has the lowest lease rates. This result means the ownership of the product of cu1511 generates more benefits.
     
    Question 8- Solution:

    The above model can be used to construct the replicating portfolio for a long cu1506copper futurescontract with a known yield. Since the yield is known, the PV(D) is equal to e-δT, so the replicating portfolio is as follow
     
    Description Today 1 year
    borrow 539.42                      539.42  
    from today to 1 year later    
    borrow46,510.48                 45,610.58               -58,879.73
    from today to 1 year later    
    buy a contract               -46,150.00                 44,600.00
    lend copper    
    Net 0               -14,279.73
     
    Question 9-Solution:
    According to the information provided, the expected demand of copper is as follow:
    March 2015: 50tons
    June 2015: 50 tons
    September 2015: 50 tons
    And through the figures of the Shanghai exchange, the price of copper is unstable.
    Picture 1: the price of copper over recent years
     

     

     
    The picture above displays the price and storage of copper fluctuates in recent years.And from the second picture, we can find the storage of the copper is in a trend of decrease. To protect our company from the risks of the rising price of copper, we plan to use the SHFE copper futures contracts to hedge the risks. With SHFE copper futures contracts,when choosing the future contracts, their delivery date, price and lease rates need be taken into consideration.
    In March 2015, we need 50 tons of copper for production, so we need use the future contracts with the delivery date before March, like cu1502 and cu1503. Comparing these two future contracts, cu1502 has higher lease rate, and its delivery date is appropriate. And according to the specifications in the SHFE copper futures contracts, 5 tons is for lot, so we need to buy 10 lots of cu1502 future contracts for our company. Similarly, in June, we also need purchase 50 tons of copper, to hedge this risk; we can buy 10 lots of cu1505 at 4th December, since the lease rate of cu1505 is high and its delivery date is in May. And we also need buy 50 tons of copper for production in September.To avoid the risk of the possible rising price; we can buy 10 lots of cu1509 to hedge the risks we face. By this approach, we can lock the price at the level we expect.
     
    Q10-Solution:
    As we know, forward contracts have some drawbacks since they are not traded in a centralized exchange. Now, if copper forward contracts are centralized cleared, the transaction costs and default risks of forward trading will decrease due to the standardized trading pattern. And since information of these trading demandsis centralized, the liquidity of the forward contracts improves. And compared with future contracts, forward contracts have some advantages, like more flexible, the specifications of the contracts can be negotiated by each parties. And with forward contracts, the commodities aredelivered at the expiration date. The payment of commodities doesn’t change any more after being negotiated, so there are no risks of fluctuation in risks, which are more suitable to be used for hedging risks. So if copper forward contracts are centralized cleared,we may prefer to use centrally cleared copper forward contracts to hedge risk.