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Exam 23: Enterprise Risk Management

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Question 21

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If a firm creates an interest rate collar on a variable rate loan,then the rate the firm pays will always:

A) remain constant at the average of the floor and cap rates.
B) remain constant at the floor rate.
C) remain constant at the cap rate.
D) be higher than, or equal to, the cap but lower than, or equal to, the floor.
E) be higher than, or equal to, the floor but lower than, or equal to, the cap.

F) A) and C)
G) B) and E)

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Question 22

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You are the buyer for a cereal company and you must buy 80,000 bushels of corn next month.The futures contracts on corn are based on 5,000 bushels and are currently quoted at 415′0 cents per bushel for delivery next month.If you want to hedge your cost,you should _____ contracts at a cost of _____ per contract.

A) buy 12; $2,075
B) buy 16; $20,750
C) buy 16; $2,075,000
D) sell 12; $2,075
E) sell 16; $2,075,000

F) All of the above
G) A) and B)

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Question 23

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By definition,which one of the following contracts is marked to the market on a daily basis?

You decided to speculate in the market and sold 8 gold futures contracts when the futures price was $867.50 per ounce.The price on the contract maturity date was $730.40.What was your total profit or loss if the contract size was 100 ounces?

Explain why a swap is effectively a series of forward contracts.

Dog's can borrow money at either a fixed rate of 8.25 percent or a variable rate set at prime plus 0.5 percent.Cat's can borrow money at either a variable rate of prime plus 1 percent or a fixed rate of 8 percent.Dog's prefers a fixed rate and Cat's prefers a variable rate.Given this information,which one of the following statements is correct?

Which one of the following methods of setting prices would reduce the transactions exposure for both the buyer and seller of a swap contract?

Southern Groves raises tangerines.To hedge its risk,the firm trades in the orange futures market.This process is known as:

A hedge between which two of the following firms is most apt to reduce each firm's financial risk exposure?

What are the primary motives for a hedger and a speculator in the derivatives market? If a wheat farmer sells wheat futures,is that hedging or speculating? Explain.

Long-run financial risk:

What is cross-hedging? Why do you suppose firms use this method of risk management? What are some of the drawbacks?

You believe the price of a stock is going to decline within the next three months.Which one of the following option payoff profiles will reflect a profit if your belief is correct?

An option contract: I.can be used to hedge risk. II.can be used to speculate in the market. III.can be based on a futures contract to create a futures option. IV.cannot be based on a foreign currency.

You purchased two May futures contracts on silver when the price quote was 10.420.Given today's closing prices as shown in the table,your total profit or loss to date is: Silver - 5,000 troy oz.: Dollars and cents per troy oz. $\begin{array} { | r | r | r | r | r | r | } \hline & \text { Open } & \text { High } & \text { Low } & \text { Settle } & \text { Chg } \\\hline \text { Mar } & 10.190 & 10.250 & 9.600 & 10.387 & - 0.484 \\\hline \text { May } & 9.655 & 9.740 & 9.655 & 9.720 & - 0.500 \\\hline\end{array}$

The value of a stock option is dependent upon the value of the underlying stock.Thus,a stock option is a:

Suppose you purchase the November call option on orange juice futures with a strike price of 150 at the price shown in the table below.What will be your profit or loss on this contract if the price of orange juice futures is $0.616 per pound at expiration of the option contract? Futures Options Orange juice: 15,000 lbs,U.S.cents per lb. $\begin{array} { | r | r | r | r | r | r | r | } \hline && { \text { Calls } } & & &&{ \text { Puts } } & \\\hline & \text { Aug } & \text { Sept } & \text { Nov } & \text { Aug } & \text { Sept } & \text { Nov } \\\hline 150 & 8.85 & 10.85 & 14.05 & 0.20 & 2.25 & 5.15 \\\hline 155 & 4.75 & 7.75 & 11.45 & 1.10 & 4.35 & 7.55 \\\hline\end{array}$

A swap dealer in the U.S.:

Which one of the following actions will provide you with the right,but not the obligation,to sell the underlying asset at a specified price during a specified period of time?

Sue recently purchased a right to buy 100 shares of ABC stock for $27.50 a share if she so chooses at any time within the next four months.Which one of the following does Sue own?