Business Environment in Canada Free Essay Example, 1500 words

In Canada and must also meet certain experience. For investors who seek to expand their businesses to Canada, they must be experienced in business, they should at least have a minimum of c$1,600,000 net which must have been obtained genuinely, and they should also manage to make an c$800,000 investment (CIC 2010). Nevertheless, business is considered the main backbone of any country and so, being cautious when it comes to foreign investors is very important. In Canada, the main spoken languages are English and French, both of which are national languages. Canada is mainly associated with polite and tolerant people. Generally, the main form of greeting in Canada is by a form of a firm handshake which is inclusive of a smile and a direct eye contact (Gorrill, 2009); however, other forms of greetings may involve a light kiss on the left and right cheek. While invited by somebody for dinner, it is always a good gesture to carry a gift, which may include wine, flowers or chocolates. In the business etiquette, Canadians practice politeness at all times and they expect that others will adhere to politeness as well. We will write a custom essay sample on Business Environment in Canada or any topic specifically for you Only $17.96 $11.86/page Non-verbal expressions are mainly used to an emphasis on a message. The Canadians also prefer some distance while communicating with someone. In addition, in Canada, it seems awkward to discuss personal lives with business associates. In the case of business meetings, timekeeping is essential, since Canadians value meetings, and delays are not an excuse. However, meeting appointments are confirmed earlier to avoid any disappointments.

The Communist Manifesto By Karl Marx - 1678 Words

The Communist Manifesto composed by Karl Marx in 1848 is noted as a standout amongst the most powerful political archives on the planet. The distribution of the book earned Marx the notoriety of a conspicuous humanist and political scholar. Regardless of his eminence, there are numerous discussions concerning the thoughts and ideas of socialism figured in the papers that are still heatedly faced off regarding even today. Marx (1998) opened the book with, The historical backdrop of all up to this point existing society is the historical backdrop of class battles. (p.4). He investigated the class contrasts and social imbalance between the Proletariats and Bourgeoisies, two terms he instituted to speak to social classes that don t possess the method for creation and social classes. Since The Communist Manifesto was delivered in a period of incredible social trouble, Marx s craving was to take out the crevice between the two classes keeping in mind the end goal to enhance the social, pol itical, and monetary states of the Proletarians. To accomplish uniformity, Marx urged the Proletarians to scheme against the Bourgeoisies to end the abuse of lower social classes and set up a revolutionary society where class qualification is a jump of creative energy. Nonetheless, his optimal required changes that a general public can t effectively adjust to and don t at last give uniformity. Marx s speculations were set up upon just class stratification and disregarded the numerousShow MoreRelatedKarl Marx And The Communist Manifesto1044 Words   |  5 Pagesworld was forever changed when Karl Marx published The Communist Manifesto, the ideas of a stateless and classless society would inspire many, and forge the path that many nations would follow, and give rise to numerous conflicts throughout the 20th century. Karl Marx was born in Trier, Germany on May 5th 1818. During his early years he studied philosophy and law, in 1834 Marx had moved to Paris and had adopted a radical view of socialism known as communism. Marx met and became friends with aRead MoreThe Communist Manifesto By Karl Marx1364 Words   |  6 PagesThe Communist Manifesto, written by Karl Marx and Friedrich Engels, has become one of the world s most significant pieces of political propaganda written to this date. The main contributor to the book was Karl Marx. Marx was born on May 5th, 1818 in Western Germany. When he turned seventeen he enrolled at the University of Bonn to study law. Due to his social misbehavior, his father had him transferred to the University of Berlin, which had a stricter regime. During this time at college, heRead MoreKarl Marx And The Communist Manifesto1185 Words   |  5 PagesIn their work called The Communist Manifesto, which was created in 1848, Karl Marx and Friedrich Engels are exploring their ideas and thoughts on the situation that was taking place in their time : the distinction that was more and more visible between two social classes - proletariat and bourgeoisie. The two authors are explaining how the bourgeoisie is exploiting the working class. They are encouraging the oppressed workers to rise and to confront this injustice in order to make their life betterRead MoreThe Communist Manifesto By Karl Marx1094 Words   |  5 Pagesthe rich and the o ppressed would battle the oppressor. During the time â€Å"The Communist Manifesto† was written, we can see two distinct classes battling out as well. These two classes are the bourgeoisie and the proletariat. According to Karl Marx in â€Å"The Communist Manifesto†, the battle will end â€Å"either in a revolutionary reconstitution of society at large, or in the common ruin of the contending classes† (Marx 8). Marx argues that in the end the proletariat would remain because the bourgeoisie areRead MoreKarl Marx And The Communist Manifesto1112 Words   |  5 PagesFail- Past, Present, and Future Karl Marx was born in Prussia in 1818. Later in his life he became a newspaper editor and his writings ended up getting him expelled by the Prussian authorities for its radicalism and atheism (Perry 195). He then met Fredrich Engels and together they produced The Communist Manifesto in 1848, for the Communist League. This piece of writing basically laid out Marx’s theory of history in short form (Coffin 623). The Communist Manifesto is mainly revolved around how societyRead MoreThe Communist Manifesto By Karl Marx Essay1374 Words   |  6 PagesKarl Marx is undoubtedly one the the most influential and controversial writers in modern history; Robert Tucker, a noted political scientist at Princeton University, once asserted, â€Å"[Marx] profoundly affected ideas about history, society, economics, ideology, culture, and politics [and] about the nature of social inquiry itself. No other intellectual influence has so powerfully shaped the mind of modern left-wing radicalism in most parts of the world.† (9). Indeed, his innumerable works, in particularRead MoreThe Communist Manifesto By Karl Marx Essay1426 Words   |  6 PagesKarl Marx is undoubtedly one the most influential and controversial writers in modern history; Robert Tucker, a noted political scientist at Princeton University, once asserted, â€Å"[Marx] profoundly affected ideas about history, society, economics, ideology, culture, and politics [and] about the nature of social inquiry itself. No other intellectual influence has so powerfully shaped the mind of modern left-wing radicalism in most parts of the world.† (9). Indeed, his innumerable works, in particularRead MoreKarl Marx And The Communist Manifesto1453 Words   |  6 PagesIn the Communist Manifesto, a document that first proclaimed the ideology of communism itself, Marx declared that the â€Å"history of all hitherto existing society is the history of class struggles† (Marx, Karl and Frederick Engels). As a m an who spurred resentment of governments and inspired revolutionaries, Karl Marx is often regarded as a man who led to the rise of 20th century tyrannical dictators such as Stalin and Mao to take power. His ideas are regarded as failures and, by some, are seen asRead MoreKarl Marx And The Communist Manifesto993 Words   |  4 PagesKarl Marx published The Communist Manifesto in 1848, and with it a public warning to capitalists that the entire economic, social and political systems would soon crumble. His prediction continues by stating where society was headed as a result of bourgeoisie economics: a revolution by the workers and the eventual ushering in of socialism. Soon after Marx publicized the reasons communism would come to conquer capitalism, riots, strikes and general unrest surfaced in France – just as he predictedRead MoreKarl Marx And The Communist Manifesto Essay1691 Words   |  7 PagesKarl Marx (1818-1883), in collaboration with his benefactor and friend, Fri edrich Engels (1820-1895), founded the Marxist Theory. Both men were philosophers, however were referred to as revolutionaries. ‘The Communist Manifesto’, was written collaboratively by both Marx and Engels, as they explored the argument that â€Å"history and progress can be seen dialectically as societies shift from one mode of production to another†. This will be argued through a contextual account of Marxism, its development

Taxation Law and Practice Finance Taxable Purposes

Question: Describe about the Taxation Law and Practice for Finance Taxable Purposes. Answer: Overview This entire assignment speaks about Australian taxation laws. By giving example of a company who deals in funeral services and ancillary activities, aspects of their transactions and their method of taxation are put into context. By referring to the Arthur Murray case, question has been raised as to what method is to be followed to assess income derived. Two methods have been discussed according to Income Tax Assessment Act, 1976. They are based on terms of when cash is received and when there is occurrence of a debt. The time for assessment is found necessary to determine as to when income should be considered for taxable purposes. Here it is also shown that how the company is paying cash dividend and its treatment of tax, rental storage space taken on lease and the treatment for tax for long service leave account. Tax treatment has also been shown for the various kinds of expenditures made by the company. Part A. Arthur Murray (NSW) PTY LTD V FC OF T (1965) 114 CLR 314 Facts The taxpayer in this case, Arthur Murray ran a business of teaching dance. He used to take fees first and then used to provide lessons. He used to give discounts to his students so they would be attracted to come to him. The tuition fees which he used to get in advance used to be entered in a suspense account as a subheading unearned deposits- untaught lessons account. When he used to finish giving the tuitions, Arthur used transfer a sum of money from the suspense account to the revenue account which matched to the actual fees for the dancing lessons provided. It was usually distinctly agreed between Arthur and his students advance tuition money would not be subject to return. However Arthur used to return the money for lessons not provided. Arthur never used to mention advance tuition money as income derived until the time he had given the actual tuition. This practise was followed though he used to get advance tuition money ("Australian Taxation Study Manual", 2016). When calculat ing his earnings, Arthur used to take into consideration only that money that was taxable and related to the dance classes in those particular years. Contention/Rebuttal The Commissioner of Income Tax came into the conclusion that the teacher used to get his earnings on a receipt basis which basically means that his tax would be calculate on the date he gets the money though he had provided lessons or not. So he decided to categorize his advance tuition money under his taxable income according to s 25(1) of the Income Tax Assessment Act 1936 (Cth ("INCOME TAX ASSESSMENT ACT 1997", 2016)). Issues The question that was discussed in the case was that whether Arthur calculated and declared his advance tuition money in the year he had actually given the tuition or the year when he had actually received the tuition money. Verdict Three judges presided the hearing of the present case held in the High Court. They were Chief justice Barwick, Justice Taylor and Justice Kitto. They derived that: The teacher had depicted the tuition fees to be received in the year when he had given it and not on the year he had actually got the fees. General norms suggest that an income of a person cannot be related to money given earlier to the service for which it is paid. Accounting and commercial norms do not support in case of a trade involving buying and selling of goods and services, money paid in advance. Such transaction cannot be termed as income. The judges completely agreed to this point and did not find any points to disagree. Though it was expressly agree between Arthur and his students that the advance tuition money would not be given back, he used to give back money for which lessons were not provided. Hence it was not possible for Arthur to treat that revenue as income since he might have returned that money as refund. So question arose in that scenario where the receipt is registered without actual money is entered as income. It was held that one could not be taxed or charged just because he/she receives earlier than the service or goods provided. The earning or revenue will remain as proper income even if the mode of receiving the money is different. No legal obstacles can be imposed on the receiver because he/she wishes to operate it at their own free will. However it is the duty of the receiver of the money which not actually earned to be kept for situations when the money could be have to be returned if the situation of money for value is not satisfied. The revenue pattern holds a characteristic w here money might be returned. The judges felt that the present scenario is quite different and they acknowledge the facts but it could also be possible that the money received had the characteristic of assessable tax money of the taxpayer. i) When income is derived? According to section 6 sub section 5 of Income Tax Assessment Act of 1997, taxpayers must take into consideration the regular earnings received across the year of earning while assessing income for year of income. According to Brent v FC of T 71 ATC 4195, tax laws have not defined the term derived. They do not have any process as general method to discover the total earnings received by the taxpaying person. Since there is no definite law income derivation is found by applying day to day commercial norms (Tiley, 2004). There are two business accepted ways that helps in finding income: Cash Basis: Also known as the receipts basis, under this method income is determined when one gets cash or something that can be converted to cash is received. According to Section 6 Subsection 5 part 4 of the ITAA Act 1997, in determining whether the person paying tax has received regular money, it is considered that the person received the income as soon as he applied for it. This rule will function when person owing money to the taxpayer directly gives the money to the person to whom the taxpayer owes money. Accruals basis: Also known as the earnings basis income is determined when the taxpayer actually earns it. This occurs when debt comes into picture. This situation takes place when services are given or necessary goods are provided, and an invoice has been given by the taxpayer to the buyer. Here the customer might not pay for the goods or services. While analysing the incomes from the funeral services and associated activities it can be asserted that all those fees which are yet to be received by the company, e.g. fees yet to be paid under the net, 30 days invoice and the fees to be derived from the contracts of external insurance for which invoices under the net, 30 days are issued are income according to earnings basis. They are those services whose payments will only be received when the services are going to be provided. Income under the receipts basis is the money received from RIP Finance Pty Ltd providing advance money. Also the money which is given by the customers periodically for future funeral purposes come under the receipts scheme. When the money is paid then only arrangements for funeral is made. Relation of the Arthur Murray case with the present case In the Arthur Murray case, the dance teacher used to take money in advance from the students and provide services post payment. However he would return the payments if he could not provide the lessons. There was a contingency for the refund of money. Otherwise his income could be treated under the receipts basis. Similarly in this case Easy Funeral Plan was a plan where money was provided in advance by the clients for future funerals. Services were only provided when the money got paid. However unlike the other case no money was returned or remitted. Hence income can be assessed for tax purpose on the date when contributions were made. Tax payers role in method of accounting for tax Section 6-5 subsection 2 and 3 of Income Tax Assessment Act, 1997 says that taxpayers have to put their total income under the ambit of income which is assessable for tax purposes. There are no hard guidelines for taxpayers of the method of keeping accounts. It is the choice of taxpayer to choose the method of accounting which would help in the proper portrayal of his income for that particular year. The methods are on the basis of receipts or earnings. In terms of cash basis, time for assessing income is when money is received though service or goods are not provided. In case of earnings basis, income is actually considered when service or goods is provided and money is due for payment. Forfeited Accounts Payment Treatment By showing the money transferred from Easy Funeral Plan to Forfeited Payments Account tax assessibility cannot be avoided because the company used to collect money before providing services. In this case the defaulting payers were not provided services. So not getting money for services not provided did not create any transaction. The income received from the plan would still be assessed under receipts basis since money was received before providing of service. Part B:- Nature of trading stock and tax treatment for that:- As per the section 70-10 of the income tax assessment act 1997, the stock in the nature of trading can be explained as any substance produced or acquired or manufactured which is held for the intention of construct, sale or exchange in the general course of business. Therefore, an item can only be trading stock if it is capable of sale as part of a trade, or if it goods, property or services in the process of production but not yet completed. RIP Pty Ltd. is a private limited company which is holding a collection of three types of caskets along with a variety of accessories for trading purpose. So these stocks kept by the company should be taken into considerations tor the purpose of computation of tax. Now the company will get a delivery of supplies for which it has already made a payment of $25000 in June 2016 but the good will be received by the company on August 2016. The concerned company can classify their methods of earnings under two heads:-receipt method as well as earnings method. Receipt method is a technique in which the earnings is detected when it is arriving not when it is accrued as per the section 6-5(4) of ITAA 1997. It is also termed as cash received basis. On the other hand, Earning method is a technique in which profits is derived as soon as it is earned. It is also termed as accrual method. As per the situation stated above, the company that is ROP Pty Ltd is prepaying the money on June 2016 whose original date of payment is August 2016. For the taxation purpose of small business enterprise as well as non business enterprise especially in the case of prepaid payments then for that particular situation then the payments will be deductable when the service period exceeds a time gap of 12 months. A prepaid expenditure is the expenses that are to be incurred under a contract for something to be done in the next accounting year. If the expenditure is incurred for something that was to be done in full withinthisincome year, that is, 1July 2016 to 30June 2017, it is not a prepaid expense and the prepayment rules do not apply (Ato, 2016). Thus, for $25000 no treatment for tax is to be made because the prepaid expenses is incurred in June 2016 but the goods are to be received by the company within the same accounting year. Adjustment with regards to items (ii), (iii), (iv) for taxation purpose:- Dividends are received by the shareholders when paid. Any kind of cash dividend that the resident shareholders of Australia receive forms a part of the taxable earnings from Australia. The dividend which is paid in cash may fully or partially be franked according to the Australian Dividend computation method. Franked Dividend is the kind of dividend in Australia which abolishes the method of dual taxation of dividend. Any kind of franking credits involved with dividends naturally creates an element of taxable earnings in Australia. On the other hand, the individual is allowed to get a refund of tax based in the franking credits involved to dividends. If the taxable earnings of the individual is too small to make the individual accountable to pay tax or overall tax burden falls below the franking credits then the individual will be permitted to obtain reimbursement from the taxation organization of Australia over and above the franking credits. Any Company of Australia is not entitled to receive any compensation but can carry forward the tax laws for utilizing it against future earnings (Nab.com.au, 2016). If the company owns a rental property from where it receives earnings then it can demand for any expenses related with the income. The expenditure related to the owning and functioning rental property should be deductable to tax. There are few examples of rental property expenses for which we can claim tax return such as legal expenses, lease costs (registration, stamp duty) repairs and maintenance etc (Etax.com.au. 2016). The payment for yearly, sick and LSL will not be deductable unless it is compensated. In this case the managing director of the company has commenced three months long service leave for which the company has paid him in advance and the amount is $22000. Thus the amount of $22000 is being deductable under the taxable provision. Deductions available for expenditure in item (v) On-site car parking:- Cost specifically excludes ~ costs that are not of a capital nature: s40à ¢Ã¢â€š ¬Ã‚ 220; ~ costs that are deductible elsewhere: s40à ¢Ã¢â€š ¬Ã‚ 215 Particulars Amount to be deducted Amount to be taxable Amount to be deductable $57466 Nil Taxable amount ($125000-$57466) $67534 Depreciating asset:à ¢Ã¢â€š ¬Ã‚  Asset that has a limited effective life; and is reasonably expected to decline in value over the period of use. But it excludes: Land and trading stock Intangibles (generally) The taxable income for the year 2015-16:- Particulars Amount Amount Franked cash dividend $21000 Rental storage space $47500 Long service leave account $22000 Onsite car parking $40000 Land Nil Preliminary architecture design $250000 Total 380500 Reference:- Australian Taxation Study Manual. (2016). Google Books. Retrieved 8 September 2016, from https://books.google.com.au/books?id=B0eIbwlkK6gCpg=PA250lpg=PA250dq=i%09Arthur+Murray+(NSW)+PTY+LTD+V+FC+OF+T+(1965)+114+CLR+314source=blots=iEYTheL_2Fsig=X4K4JsOx5yGn4jtJ7sJlJuTZrQwhl=ensa=Xved=0ahUKEwjP8efI5__OAhVJtY8KHclkDpMQ6AEIRzAI#v=onepageq=i%09Arthur%20Murray%20(NSW)%20PTY%20LTD%20V%20FC%20OF%20T%20(1965)%20114%20CLR%20314f=false Etax.com.au. (2016). Rental Property Tax Deductions: Remember to Claim These. [online] Available at: https://www.etax.com.au/rental-property-expenses [Accessed 8 Sep. 2016]. INCOME TAX ASSESSMENT ACT 1997. (2016). Austlii.edu.au. Retrieved 8 September 2016, from https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/ Nab.com.au. (2016). Detailed tax information about dividends (Cash Dividend, DRP, and BSP). [online] Available at: https://www.nab.com.au/about-us/shareholder-centre/dividend-information/detailed-tax-information-about-dividends-cash-dividend-drp-and-bsp# [Accessed 8 Sep. 2016]. Tiley, J. (2004). Studies in the history of tax law. Oxford: Hart. Ato.gov.au. (2016).Deductions for prepaid expenses 2014-15 | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/Forms/Deductions-for-prepaid-expenses-2014-15/?page=2 Ato.gov.au. (2016).Vacant land | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/General/Property/Land---vacant-land-and-subdividing/Vacant-land/ [Accessed 14 Sep. 2016].

Solutions Ch Essay Example

Solutions Ch Paper The conversion factor for a bond is equal to the quoted price the bond would eave per dollar of principal on the first day of the delivery month on the assumption that the interest rate for all maturities equals 6% per annum (with semiannual compounding). The bond maturity and the times to the coupon payment dates are rounded down to the nearest three months for the purposes of the calculation. The conversion factor defines how much an investor with a short bond futures contract receives when bonds are delivered, If the conversion factor is 1. 2345 the amount investor receives is calculated by multiplying 1. 345 by the most recent futures price and adding accrued interest, Problem A Arteriolar futures price changes from 36. 76 to 9682. What is the gain or loss to an investor who is long two contracts? The Arteriolar futures price has increased by 6 basis points. The investor makes again per contract of or $300 in total. Problem 6. 5. What is the purpose Of the convexity adjustment ma de to Arteriolar futures rates? Why is the convexity adjustment necessary? Suppose that a Arteriolar futures quote is 95. 00. This gives a futures rate of 5% for the three-month period covered by the contract. The convexity adjustment is the amount by which futures rate has to be reduced to give an estimate of he forward rate for the period. The convexity adjustment is necessary because a) the futures contract is settled daily and b) the futures contract expires at the beginning of the three months. 80th of these lead to the futures rate being greater than the forward rate, problem 6,6, The 350-day LABOR rate is 3% with continuous compounding and the forward rate calculated from a Arteriolar futures contract that matures in 350 days is 3. 2% with continuous compounding. Estimate the 440-day zero rate. From equation (6. ) the rate is or 3. 0409%. Problem 6. 7. It is January 30. YOU are managing a bond portfolio worth 56 million. The duration of the portfolio in six months will be 8. 2 years. The September Treasury bond futures price is currently 108-15, and the cheapest-to-deliver bond Will have a duration of 7. 6 years in September. How should you hedge against changes in interest rates ov er the next six months? The value of a contract is The number of contracts that should be shorted is Rounding to the nearest whole number, 60 contracts should be shorted. The position should be closed out at the end of July. Problem 6. , The price of a 90-day Treasury bill is quoted as 10. 00. What continuously compounded return (on an actual/ASS basis) does an investor earn on the Treasury bill for the 90-day period? The cash price of the Treasury bill is The annulled continuously compounded return is Problem 6. 9. It is May 5, 2011. The quoted price off government bond with a 12% coupon that matures on July 27, 2014, is 110-17. What is the cash price? The number Of days between January 27, 2011 and May 5, 2011 is 98. The number of days between January 27, 201 1 and July 27, 2011 is 181. The accrued interest is therefore The quoted price is 110. 312. The cash price is therefore or $113. 78. Problem 6. 10. Suppose that the Treasury bond futures price is 101-12. Which of the followin g tour bonds is cheapest to deliver? Bond Price Conversion Factor 125-05 1 _2131 142-15 1. 3792 115-31 1. 1149 144-02 1. 4026 The cheapest-to-deliver bond is the one for which is least. Calculating this factor for each of the 4 bonds we get Bond 4 is therefore the cheapest to deliver. Problem 6,11_ It is July 30, 2013. The cheapest-Weedier bond in a September 2013 Treasury bond futures contract is a 13% coupon bond, and delivery is expected to be made on September 30, 2013. We will write a custom essay sample on Solutions Ch specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Solutions Ch specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Solutions Ch specifically for you FOR ONLY $16.38 $13.9/page Hire Writer Coupon payments on the bond are made on February 4 and August 4 each year. The term Structure is flat, and the rate Of interest with semiannual compounding is 12% per annum. The conversion factor for the bond is IS. The current quoted bond price is $110. Calculate the quoted futures price for the contract. There are 176 days between February 4 and July 30 and 181 days between February 4 and August 4. The cash price of the bond is, therefore: The rate of interest with continuous compounding is or 11. 65% per annum. A coupon of 6. 5 will be received in 5 days years) time. The present value of the coupon is The futures contract lasts for 62 days years). The cash tortures price it the contract were written on the bond would be At delivery there are 57 days of accrued interest. The quoted futures price if the contract were written on the 13% bond would therefore be Taking the conversion factor into account the quoted futures price should be: Problem 6. 12. An investor is looking for arbitrage opportunities in the Treasury bond futures market. What complications are created by the fact that the party With a short position can choose to deliver any bond with a maturity of over 15 years? If the bond to be delivered and the time of delivery were known, arbitrage old be straightforward. When the futures price is too high, the arbitrageur buys bonds and shorts an equivalent number of bond futures contracts. When the futures price is too low, the arbitrageur shorts bonds and goes long an equivalent number of bond futures contracts. Uncertainty as to which bond will be delivered introduces complications. The bond that appears cheapest-to- deliver now may not in fact be cheapest-to-deliver at maturity. In the case where the futures price is too high, this is not a major problem since the party with the short position (i. . , the arbitrageur) determines which bond is to be delivered, In he case where the futures price is too low, the arbitrageurs position is tar more difficult since he or she does not know which bond to short; it is unlikely that a profit can be locked in for all possible outcomes. Problem 6. 13. Suppose that the nine-month LABOR interest rate is 8% per ann um and the six- month LABOR interest rate is 7 per annum (both with actual/ASS and continuous compounding). Estimate the three-month Arteriolar futures price quote for a contract maturing in six months. The forward interest rate for the time period between months 6 and g is per annum with continuous compounding. This is because 9% per annum for three months when combined With 7% per annum for six months gives an average interest rate of 8% per annum for the nine-month period. With quarterly compounding the forward interest rate is or 9. 102%. This assumes that the day count is actual/actual. With a day count of actual/360 the rate is The three-month Arteriolar quote for a contract maturing in six months is therefore Problem 6. 14. Suppose that the 300-day LABOR zero rate is and Arteriolar quotes for contracts maturing in 300, 398 and 489 days are 95. 83, 95. 62, and 95. 48 Calculate 98-day and 489-day LABOR zero rates, Assume no difference between forward and futures rates for the purposes of your calculations. The forward rates calculated form the first two Arteriolar futures are 4. 17% and 4. 38%_ These are expressed with an actual/ICC day count and quarterly compounding. With continuous compounding and an actual/365 day count they are and 4. 4167%. It follows from equation (6. 4) that the 398 day rate is (4000+4. 060x38V 398=4. 0507 or 4. 0507%. The 489 day rate is (4. 0507098+4. 4167* 188 or 4. 1188%. We are assuming that the first futures rate applies to 98 days rather than the usual 91 days. The third futures quote is not needed. Problem 6. 15. Suppose that a bond portfolio with a duration of 12 years is hedged using a futures contract in which the underlying asset has a duration of four years. What is l ikely to be the impact on the hedge of the fact that the 12-year rate is less volatile than the tour-year rate? Duration-based hedging procedures assume parallel shifts in the yield curve. Since the 12-year rate tends to move by less than the 4-year rate, the portfolio manager may find that he or she is over-hedged. Problem 6. 16. Suppose that it is February 20 and a treasurer realizes that on July 1 7 the many will have to issue $5 million of commercial paper with a maturity of 180 days If the paper were issued today, the company would realize (In other words, the company would receive $4,820,000 for its paper and have to redeem it at in 180 days time. ) The September Arteriolar futures price is quoted as 92. 00. How should the treasurer hedge the companys exposure? The company treasurer can hedge the companys exposure by shorting Arteriolar futures contracts. The Arteriolar futures position leads to a profit if rates rise and a loss if they fall. The duration Of the commercial paper is nice that of the Arteriolar deposit underlying the Arteriolar futures contract. The contract price of a Arteriolar futures contract is 980,000. The number of contracts that should be shorted is, therefore, Rounding to the nearest whole number 10 contracts should be shorted. Problem 6. 17. On August 1 a portfolio manager has a bond portfolio worth $10 million. The duration of the portfolio in October will be 7. Years, The December Treasury bond futures price is currently 91-12 and the cheapest-to-deliver bond will have a duration of 8. 8 years at maturity. How should the portfolio manager minimize he portfolio against changes in interest rates over the next two months? The treasurer should short Treasury bond futures contract. If bond prices go down, this futures position will provide offsetting gains. The number of contracts that should be shorted is Rounding to the nearest whole number 88 contracts should be shorted. Problem 6. 18. HOW can the portfolio manager change the duration Of the portfolio to 3. Years in Problem 6. 17? The answer in Problem 6. 17 is designed to reduce the duration to zero. To reduce the duration from 7. 1 to 3. 0 instead of from 7. 1 to O, the treasurer should short or 51 contracts. Problem 6. 9. Between October 30, 2012, and November l, 2012, you have a choice between owning a LIES. Government bond paying a 12% coupon and a LIES. Corporate bond paying a coupon. Consider carefully the day count conventions discussed in this chapter and decide which of the two bonds you would prefer to own. Ignore the risk of default, You would prefer to own the Treasury bond. Under the 30/360 day count convention there is one day between October 30 and November 1. Under the actual/actual (in period) day count convention, there are two days, Therefore you would earn approximately twice as much interest by holding the Treasury bond. Problem 6. 20. Suppose that a Arteriolar futures quote is 88 for a contract maturing in 60 days. What is the LABOR poniard rate for the 60- to 150-day period? Ignore the difference between futures and forwards for the purposes Of this question. The Arteriolar futures contract price Of 88 means that the Arteriolar futures rate is 12% per annum with quarterly compounding. This is the forward rate for the 60. To 150. Day period with quarterly compounding and an actual/360 day count convention. Problem 6. 21. The three-month Arteriolar futures price for a contract maturing in six years is quoted as 95. 0, The standard deviation of the change in the short-term interest rate in one year is 1. 1%. Estimate the forward LABOR interest rate tort the period between 6. 00 and 6. 25 years in the future, Using the notation of Section 6,3, , , and The convexity adjustment is or about 23 basis points. The futures rate is with quarterly compounding and an actual,BIB day count. This becomes with an actual/actual day count. It is faith continuous compounding. The forward rate is therefore with continuous compounding. Problem 6. 22. Explain Why the forward interest rate is less than the corresponding futures interest rate calculated from a Arteriolar futures contract. Suppose that the contracts apply to the interest rate between times and . There are two reasons for a difference between the forward rate and the futures rate. The first is that the futures contract is settled daily whereas the forward contract is settled once at time . The second is that without daily settlement a futures contract would be settled at time not . Both reasons tend to make the futures rate greater than the forward rate. Further Questions problem 6,23 The December Arteriolar futures contract is quoted as 98. 40 and a company Lana to borrow $8 million for three months starting in December at LABOR plus 0. 5%. (a) What rate can then company lock in by using the Arteriolar futures contract? (b) What position should the company take in the contracts? (c) Fifth actual three-month rate turns out to be 1. 3%, what is the final settlement price on the futures contracts, Ignore timing mismatches between the cash flows from the Arteriolar futures contract and interest rate cash flows. A) The company can lock in a 3-month rate of 100 98. 4=1. 60%. The rate it pays is therefore locked in at 1. 6 * O. S = 2. 1%. (b) The company should sell (i. . , short) 8 contracts. If rates increase, the futures quote goes down and the company gains on the futures. Similarly, if rates decrease, the futures quote goes up and the company loses on the futur es. (c) The final settlement price is 100 1. 30 = 98. 70. Problem 624 A Arteriolar futures quote for the period been 5. 1 and 5. 35 year in the future is 97. 1. The standard deviation of the change in the short. Term interest rate in one year is 1. %. Estimate the foamed interest rate in an FAR. The futures rate is 2. 9%. The foamed rate can be estimated using equation (6. 3) as 0. 029-0. 5* 0. 0142 0. 263 or 2. 63%. Problem 6,25 It is March 10, 2011. The cheapest-to-deliver bond in a December 2011 Treasury bond futures contract is an coupon bond, and delivery is expected to be made on December 31 31, 2011. Coupon payments on the bond are made on March I and September I each year _ The term structure is flat, and the rate of interest with continuous compounding is 5% per annum. The conversion factor for the bond is 1. 2191. The current quoted bond price is $137. Calculate the quoted futures price for the contract. The cash bond price is currently A coupon of a will be received after 1 75 days or 0. 795 years. The present value Of the coupon on the bond is e-C. Ox. 4795=3. SASS. The futures contract lasts 296 days or 0. 8110 years. The cash futures price it were written on the 8% bond would therefore be (137. 1957 3. 9053)e. Sox. 8110 -138. 8061 At delivery there are 121 days of accrued interest. The quoted futures if the contract were written on the 8% bond would therefore be The quoted price should therefore be problem 6. 6. Assume that a bank can borrow or lend money at the same interest rate in the LABOR market, The go-day rate is per annum, and the 180-day rate is 10. 2% re annum, both expressed with continuous compounding The Arteriolar futures price for a contract maturing in 91 days is quoted as 89,S, What arbitrage opportunities are open to the bank? The Arteriolar futures contract price of 83. 5 means that the Arteriolar futures rate is 108% per annum with quarterly compounding and an actual/360 day count This becomes with an actual/actual day count. This is or 1051 % with continuous compounding. The forward rate given by the 90-day rate and the 180-day rate is 10. 4% with continuous compounding. This suggests the following arbitrage opportunity: 1. Buy Arteriolar futures. 2. Borrow 180-day money. 3. Invest the borrowed money for 90 days. Problem 6. 27. A Canadian company wishes to create a Canadian LABOR futures contract from a U. S. Arteriolar futures contract and forward contracts on foreign exchange. Lasing an example, explain how the company should proceed. For the purposes of this problem, assume that a futures contract is the same as a forward contract. The U. S.