Question

1. Commercial paper may show up on corporate balance sheets as either

a current asset or a current liability. Explain this statement.

2. What is the difference between pledging accounts receivable and factoring accounts receivable?

3. What is an asset-backed public offering?

   4. Briefly discuss three types of lender control used in inventory financing.

5. What is meant by hedging in the financial futures market to offset interest rate risks?

The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at $138,000 per contract. It is July and the contracts must be closed out in December of this year. Long-term interest rates are currently 13.3 percent. If they increase to 14.5 percent, assume the value of the contracts will go down by 5 percent. Also if interest rates do increase by 1.2 percent, assume the firm will have additional interest expense on its business loans and other commitments of $53,000. This expense, of course, will be separate from the futures contracts.

         a.      What will be the profit or loss on the futures contract if interest rates go to 14.5 percent by December when the contract is closed out?

         b.      Explain why a profit or loss took place on the futures contracts.

         c.      After considering the hedging in part a, what is the net cost to the firm of the increased interest expense of $53,000? What percent of this $53,000 cost did the treasurer effectively hedge away?

         d.      Indicate whether there would be a profit or loss on the futures contracts if interest rates dropped.

Answer 1

Commercial paper is the short term instruments which a large corprations issues in order to meet short term cash needs. If the companies investing in this security then it will be assets for the company and will appear on the assets side of the balance sheet. If the issues the commpercial paper, then it will be liability and will appear on th liabilities side of the balance sheet. Thise is how it will appear on the balance sheet.

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