(Related to Checkpoint 20.1) (Hedging with forward contracts) The Specialty Chemical Company operates a crude oil refinery located in New Iberia, Louisiana. The company refines crude oil and sells the by-products to companies that make plastic bottles and jugs. The firm is currently planning for its refining needs for one year hence. Specifically, the firm's analysts estimate that Specialty will need to purchase 1 million barrels of crude oil at the end of the current year to provide the feed stock for its refining needs for the coming year. The 1 million barrels of crude will be converted into by-products at an average cost of $40 per barrel that Specialty expects to sell for $170 million, or $170 per barrel of crude used. The current spot price of oil is $125 per barrel and Specialty has been offered a forward contract by its investment banker to purchase the needed oil for a delivery price in one year of $130 per barrel. a. Ignoring taxes, what will Specialty's profits be if oil prices in one year are as low as $110 or as high as $150, assuming that the firm does not enter into the forward contract? b. If the firm were to enter into the forward contract, demonstrate how this would effectively lock in the firm's cost of fuel today, thus hedging the risk of fluctuating crude oil prices on the firm's profits for the next year.

a) $110 per barrel equals 20,000,000 gains

while %150 per barril equals 20,000,000 loss

b) by entering the fordward contract the firm will purchase the barrel at the market value of the moment but, the contract will give the difference to the firm when it is above that level thus, there is no risk of a higher cost)

If the price is below 130 dollars then, the firm will pay the difference to the other party. In both cases, the total cost for the millon barrels is $130,000,000 therefore, there is no risk on the fluctuation of the barrel of crude oil.

Explanation:

a) revenues - total cost = income

where cost can be explained as conversion csot and material cost.

170 million revenues - 40  conversion cost - 110 materials = 20 million gain

170 million revenues - 40  conversion cost - 150 materials = -20 million loss

Specialty Chemical company

                                              low spot rates($110)     high Spot rates (150)

selling price                             $170 million                $170 million

cost of sales( 1 million)            $110 million                 $150 million

profits                                       $60 million                 $20 million

b.  The forward exchange contract versus the current spot rate is not a wise decision and has a loss of $ 5 million [($125 - $13) * 1 million] if the oil was to be bought using the current spot rate, but the Hedge is for next year and if spot rates increases then the Hedge will be an asset. if the spot rate is lower than the hedge then it is an liability. Demonstration needs  actual spot rate for the date of oil purchase.

Explanation:

sound is invisible, but sometimes we can feel it. when a kettle-drum is thumped with a stick that time the tight drum skin moving up and down very quickly for some time and then it pumped sound waves into the air. loudspeakers also work in a similar manner.

components of a speaker:

electromagnet

in order to translate an electrical signal into an audible sound, an electromagnet is used in looudspeakers

  suspension

suspension is used to   center the voice coil in the gap of the magnet and it exerts a restoring force to keep it there. suspension is used to limits the maximum mechanical excursion of the diaphragm and voice coil.

voice coil

voice coil is a coil of wire which is attached to the apex of a loudspeaker cone. it provides the motive force to the cone by the reaction of a magnetic field to the current passing through it.

cone

in a   loudspeaker, a   thin, semi-rigid membrane attached to the voice coil, which moves in a magnetic gap due to which it vibrates   and produced sound. it is known as diaphragm and it can also be called a cone, though not all speaker diaphragms are cone-shaped.

surround

surround is also known as front suspension. surround is used to join the cone to the chassis. together with the suspension it controls the cone excursion, and it is also used to   determine how energy which is   travelling through the cone is absorbed, and how the speaker limits when it reaches the ends of its travel.

dustcap

dustcap is used to protect the voice coil from dust and dirt. it is a part of the cone.

how speaker work

the outer part of the cone is fastened to the outer part of the loudspeaker's circular metal rim. the inner part is fixed to   voice coil that sits just in front of a permanent magnet . when loudspeaker is hooked up to a stereo, electrical signals feed through the speaker cables into the coil. it will convert the coil into an electromagnet magnet . when electricity flows back and forth in the cables, the electromagnet either repels or attract the permanent magnet. this moves the coil back and forth, and it pull and push the loudspeaker cone. like a drum skin vibrating back and forth, the moving cone pumps sounds out into the air.in this way loudspeakers works.

it should be