Free «Financial Accounting» Essay Sample

Financial Accounting

What are the basic differences between futures, forwards and options?

Futures and forwards are types of contracts that involve buying/selling and delivering specific commodities (goods/services) at a specific future date and at a specific price. The difference between the two is that the former has fixed terms and is traded on a regulated futures exchange, whereas the latter has neither fixed terms nor is it regulated on a regulated exchange. The third type of contract, the options contract, also involves buying/selling and delivering a specific commodity at a given price. However, option contracts differ from the former two given that they do not obligate the contract buyer to buy/sell that commodity. All that the options contract contemplate is that the buyer has the right to buy/sell by or before a given date (usually referred to as the expiration date).

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Describe the difference between a call and a put option.

There are two types of options, the “call” and the “put.” The call option differs from the put option in that it gives the buyer a right to buy a given commodity at a given price; the put option gives the buyer to sell a given commodity at a given price.  

What is the total cost of premium paid  to hedge 168,000 gallons of light sweet crude at 70/barrel  with July 2009?

The total cost of premium paid to hedge 168,000 gallons of light sweed crude at a premium cost of 70/barrel with July 2009 would be 11,760,000.

Assuming the price of oil is 75/barrel with July 2009 what is the total gain or loss of the hedge?

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Assuming that the price of oil is 75/barrel with July 2009 the total gain of the hedge would be equal to 840,000 given the differencial produced by the increased price/barrel (relative to the premium cost/barrel).

Assuming the price of oil was 60/barrel in July, what is the total gain/loss of the hedge?

Assuming that the price of oil was 60/barrel in July, the total loss of the hedge would be equal to 1,680,000 given the differencial produced by the decreased price/barrel (relative to the premium cost/barrel).

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