Chapter 23 Enterprise Risk Management
1.
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Farmer Jones raises several hundred acres of corn and would suffer a significant loss should the price of corn decline at harvest time. Which one of the following would he be doing if he purchased financial securities to offset this price risk?
Refer to section 23.2
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AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-01 The exposures to risk in a company's business and how a company could choose to hedge these risks. Section: 23.2 Topic: Hedging |
2.
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The value of a stock option is dependent upon the value of the underlying stock. Thus, a stock option is a:
Refer to section 23.2
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AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-01 The exposures to risk in a company's business and how a company could choose to hedge these risks. Section: 23.2 Topic: Derivative security |
3.
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Farmer Mac owns a large orange grove in Florida. The value of his business is directly related to the price of oranges. Which one of the following is a graphical representation of this price-value relationship?
Refer to section 23.2
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-01 The exposures to risk in a company's business and how a company could choose to hedge these risks. Section: 23.2 Topic: Risk profile |
4.
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Farmer Ted planted 200 acres in wheat this year. The weather has been perfect and he expects to harvest a record crop within the next two weeks. At present, he has no storage facilities and therefore must sell his crop as soon as it is harvested. Which one of the following risks is he facing because he must sell his crop at whatever the market price is at harvest time?
Refer to section 23.2
|
AACSB: Analytic
Blooms: Understand Difficulty: 1 Easy Learning Objective: 23-01 The exposures to risk in a company's business and how a company could choose to hedge these risks. Section: 23.2 Topic: Transactions exposure |
5.
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For years, your family has operated a business that produces lawn mowers. Over the years, the industry has progressed and new mass production techniques have been developed. However, your firm cannot afford this new technology, nor can you compete against those firms that can. Thus, the family has decided to close its facility at the end of the year. Which one of the following describes the risks to which your family's firm succumbed?
Refer to section 23.2
|
AACSB: Analytic
Blooms: Understand Difficulty: 1 Easy Learning Objective: 23-01 The exposures to risk in a company's business and how a company could choose to hedge these risks. Section: 23.2 Topic: Economic exposure |
6.
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This morning a cereal maker agreed to pay a farmer $4.40 a bushel for 5,000 bushels of wheat that the farmer will ship to the factory four months from now. What is this legally binding agreement called?
Refer to section 23.3
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AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.3 Topic: Forward contract |
7.
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A graph depicting the gains and losses a seller of a forward contract would earn at various market prices is referred to as a:
Refer to section 23.3
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.3 Topic: Payoff profile |
8.
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By definition, which one of the following contracts is marked to the market on a daily basis?
Refer to section 23.4
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Futures contract |
9.
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Southern Groves raises tangerines. To hedge its risk, the firm trades in the orange futures market. This process is known as:
Refer to section 23.4
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Cross-hedging |
10.
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The National Bank has an agreement with The Foreign Bank to exchange 500,000 U.S. dollars for 380,000 Euros on the first day of each of the next 3 calendar quarters. This agreement is best described as a(n):
Refer to section 23.5
|
AACSB: Analytic
Blooms: Understand Difficulty: 1 Easy Learning Objective: 23-03 The basics of swap contracts and how they are used to hedge interest rates. Section: 23.5 Topic: Swap contract |
11.
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An agreement that grants its owner the right, but not the obligation, to buy or sell a specific asset at a specific price for a set period of time is called a(n) _____ contract.
Refer to section 23.6
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AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.6 Topic: Option contracts |
12.
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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?
Refer to section 23.6
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.6 Topic: Call option |
13.
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Steve recently sold an option that requires him to purchase 100 shares of Omega stock at $40 a share should the option owner decide to exercise the option. What type of option contract did Steve sell?
Refer to section 23.6
|
AACSB: Analytic
Blooms: Understand Difficulty: 1 Easy Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.6 Topic: Put option |
14.
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Which one of the following can a firm do if it effectively manages its financial risks?
Refer to section 23.2
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-01 The exposures to risk in a company's business and how a company could choose to hedge these risks. Section: 23.2 Topic: Financial risk management |
15.
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A hedge between which two of the following firms is most apt to reduce each firm's financial risk exposure?
Refer to section 23.2
|
AACSB: Analytic
Blooms: Understand Difficulty: 1 Easy Learning Objective: 23-01 The exposures to risk in a company's business and how a company could choose to hedge these risks. Section: 23.2 Topic: Financial risk management |
16.
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Which one of the following statements is correct in relation to a firm's short-run financial risk?
Refer to section 23.2
|
AACSB: Analytic
Blooms: Understand Difficulty: 1 Easy Learning Objective: 23-01 The exposures to risk in a company's business and how a company could choose to hedge these risks. Section: 23.2 Topic: Short-run financial risk |
17.
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Long-run financial risk:
Refer to section 23.2
|
AACSB: Analytic
Blooms: Understand Difficulty: 1 Easy Learning Objective: 23-01 The exposures to risk in a company's business and how a company could choose to hedge these risks. Section: 23.2 Topic: Long-run financial risk |
18.
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By hedging financial risk, a firm can:
Refer to section 23.2
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-01 The exposures to risk in a company's business and how a company could choose to hedge these risks. Section: 23.2 Topic: Hedging |
19.
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The seller of a forward contract:
Refer to section 23.3
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.3 Topic: Forward contract |
20.
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A bakery generally enters into a forward contract in wheat as a:
Refer to section 23.3
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.3 Topic: Forward contract |
21.
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A forward contract:
Refer to section 23.3
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.3 Topic: Forward contract |
22.
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Which one of the following is true regarding forward contracts?
Refer to section 23.3
|
AACSB: Analytic
Blooms: Understand Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.3 Topic: Forward contract |
23.
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A payoff profile:
Refer to section 23.3
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.3 Topic: Payoff profile |
24.
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Futures contracts:
Refer to section 23.4
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Futures contract |
25.
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Which of the following are futures exchanges?
I. New York Mercantile Exchange II. New York Stock Exchange III. Chicago Board of Trade IV. NASDAQ
Refer to section 23.4
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Futures contract |
26.
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Given the following information, what is the price per troy ounce that will be used for today's marking-to-market for the December silver contract?
Silver - 5,000 troy oz.: dollars and cents per troy oz.
Refer to section 23.4
|
AACSB: Analytic
Blooms: Understand Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Futures price |
27.
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What was the highest price per troy ounce for the December silver futures contract today?
Silver - 5,000 troy oz.: dollars and cents per troy oz.
Refer to section 23.4
|
AACSB: Analytic
Blooms: Understand Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Futures price |
28.
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Browning Enterprises currently has all fixed-rate debt. The firm would like to convert part of this to floating-rate debt. Which one of the following will accomplish this for the firm?
Refer to section 23.5
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-03 The basics of swap contracts and how they are used to hedge interest rates. Section: 23.5 Topic: Swap contract |
29.
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Which one of the following is the primary difference between a swap contract and a forward contract?
Refer to section 23.5
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-03 The basics of swap contracts and how they are used to hedge interest rates. Section: 23.5 Topic: Swap contract |
30.
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Interest rate swaps:
I. benefit either the buyer or the seller, but not both. II. are often used in conjunction with a currency swap. III. are commonly used in business. IV. can be used to change the index which determines the variable rate on a firm's debt.
Refer to section 23.5
|
AACSB: Analytic
Blooms: Understand Difficulty: 2 Medium Learning Objective: 23-03 The basics of swap contracts and how they are used to hedge interest rates. Section: 23.5 Topic: Interest rate swap |
31.
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Which one of the following methods of setting prices would reduce the transactions exposure for both the buyer and seller of a swap contract?
Refer to section 23.5
|
AACSB: Analytic
Blooms: Understand Difficulty: 1 Easy Learning Objective: 23-03 The basics of swap contracts and how they are used to hedge interest rates. Section: 23.5 Topic: Swap contract |
32.
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A swap dealer in the U.S.:
Refer to section 23.5
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-03 The basics of swap contracts and how they are used to hedge interest rates. Section: 23.5 Topic: Swap dealer |
33.
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Company A can borrow money at a fixed rate of 7.5 percent or a variable rate set at prime plus 0.5 percent. Company B can borrow money at a variable rate of prime plus 1 percent or a fixed rate of 7 percent. Company A prefers a fixed rate and company B prefers a variable rate. Given this information, which one of the following statements is correct?
Refer to section 23.5
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 23-03 The basics of swap contracts and how they are used to hedge interest rates. Section: 23.5 Topic: Interest rate swap |
34.
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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?
Refer to section 23.5
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 23-03 The basics of swap contracts and how they are used to hedge interest rates. Section: 23.5 Topic: Interest rate swap |
35.
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Murray's can borrow money at a fixed rate of 10.5 percent or a variable rate set at prime plus 2.25 percent. Fred's can borrow money at a variable rate of prime plus 1.5 percent or a fixed rate of 12 percent. Murray's prefers a variable rate and Fred's prefers a fixed rate. Given this information, which one of the following statements is correct?
Refer to section 23.5
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 23-03 The basics of swap contracts and how they are used to hedge interest rates. Section: 23.5 Topic: Interest rate swap |
36.
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A call option contract:
Refer to section 23.6
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.6 Topic: Option contracts |
37.
|
The buyer of an option contract:
Refer to section 23.6
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.6 Topic: Option contracts |
38.
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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.
Refer to section 23.6
|
AACSB: Analytic
Blooms: Remember Difficulty: 2 Medium Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.6 Topic: Option contracts |
39.
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Which two of the following are key differences between an option contract and a forward contract?
I. option contracts can be resold but forward contracts cannot II. the option price is determined at settlement while the forward price is determined when the contract is initiated III. the rights and obligations of the buyer IV. cost when contract initiated
Refer to sections 23.3 and 23.6
|
AACSB: Analytic
Blooms: Understand Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.3 and 23.6 Topic: Option and forward contracts |
40.
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A firm with a variable-rate loan wants to protect itself from increases in interest rates. Which of the following would interest this firm?
I. interest rate floor II. interest rate cap III. put option on an interest rate IV. call option on an interest rate
Refer to section 23.6
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.6 Topic: Call option |
41.
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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:
Refer to section 23.6
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.6 Topic: Interest rate collar |
42.
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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?
Refer to section 23.6
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.6 Topic: Call option |
43.
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Which one of the following obligates you only on the expiration date to sell an asset at the strike price if the option is exercised?
Refer to section 23.6
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.6 Topic: Option contracts |
44.
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Which one of the following statements concerning option payoffs is correct?
Refer to section 23.6
|
AACSB: Analytic
Blooms: Understand Difficulty: 1 Easy Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.6 Topic: Option payoff |
45.
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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?
Refer to section 23.6
|
AACSB: Analytic
Blooms: Understand Difficulty: 1 Easy Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.6 Topic: Option payoff |
46.
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You own shares of a stock and believe the stock price will increase in the future. However, you realize the stock price could decline and want to hedge that risk. Which one of the following option positions should you take to create the desired hedge?
Refer to section 23.6
|
AACSB: Analytic
Blooms: Analyze Difficulty: 1 Easy Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.6 Topic: Option payoff |
47.
|
Most of the evidence to-date indicates that firms with which two of the following characteristics are most apt to frequently use derivatives?
I. firms with low financial distress costs II. firms with high financial distress costs III. firms with easy access to capital markets IV. firms with constrained access to capital markets
Refer to section 23.6
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.6 Topic: Derivatives use |
48.
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What is the closing value on this day for one March futures contract on silver?
Silver - 6,000 troy oz.: U.S. dollars and cents per troy oz.
Closing value = $10.254 × 6,000 = $61,524
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Contract value |
49.
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You own three January futures contracts on gold. What is the total value of your position as of the end of this day's trading?
Gold - 100 troy oz.: U.S. dollars and cents per troy oz.
Position value = 3 × 100 × $660.50 = $198,150
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Contract value |
50.
|
What is the closing value on this day for one March futures contract on ethanol?
Ethanol - 32,000 U.S. gallons: U.S. dollars and cents per gallon
Contract value = 32,000 × $1.704 = $54,528
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Contract value |
51.
|
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.
Total loss to date = 2 × 5,000 × ($9.720 - $10.420) = -$7,000
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Contract profit |
52.
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You purchased four April futures contracts on gold when the price quote was 692.5. Given today's closing prices as shown in the table, what is your current profit or loss?
Gold - 100 troy oz.: U.S. dollars and cents per troy oz.
Total profit to date = 4 × 100 × ($745 - $692.50) = $21,000
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Contract profit |
53.
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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?
Total loss = 8 × 100 × ($867.50 - $730.40) = $109,680
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Contract profit |
54.
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You expect to deliver 42,000 bushels of wheat to the market in July. Today, you hedge your position by selling futures contracts on half of your expected delivery at the final price of the day. Assume that the market price turns out to be 582.0 when you actually deliver the wheat. How much more or less would you have earned if you had not bought the futures contracts?
Wheat - 5,000 bu.: U.S. cents per bu.
Loss on contract = (0.5 × 42,000) × [(582.0′ - 561.5′)/100] = $4,305. You would have received $4,305 more if you had not sold the futures contract.
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Futures hedge |
55.
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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.
Number of contracts = 80,000/5,000 = 16 contracts
Contract value = 5,000 × (415.0′/100) = $20,750. You should buy 16 contracts at $20,750 per contract. |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Futures hedge |
56.
|
You are a jewelry maker. In May of each year, you purchase 10,000 troy ounces of silver to restock your production inventory. Today, you hedged your position at what turned out to be the lowest price of the day. Assume the actual price per troy ounce of silver is 9.215 in May. How much did you gain or lose by hedging your position?
Silver - 5,000 troy oz.: U.S. dollars and cents per troy oz.
Savings = 2 × 5,000 × ($9.215 - $9.550) = -$3,350. You lost $3,350 by hedging.
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Futures hedge |
57.
|
You are the purchasing agent for a major cookie company. You anticipate that your firm will need 20,000 bushels of oats in December. You decide to hedge your position today and did so at the closing price of the day. Assume that the actual market price turns out to be 228.0 on the day you actually buy the oats. How much did you gain or lose by hedging your position?
Oats - 5,000 bu.: cents per bu.
Savings = 4 × 5,000 × [(228′ - 230′)/100] = -$400
You lost $400 by hedging. |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Futures hedge |
58.
|
How much will you pay per pound for a September 130 orange juice futures call option?
Orange juice - 15,000 lbs: U.S. cents per lb.
Cost per pound = $0.055
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.6 Topic: Futures options |
59.
|
How much will you pay to purchase five August 125 orange juice futures put option contracts?
Orange juice - 15,000 lbs: U.S. cents per lb.
Total cost = 5 × 15,000 × (5.55′/100) = $4,162.50
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.6 Topic: Futures options |
60.
|
Suppose you purchase a September cocoa futures contract at the last price of the day as shown in the table below. What will be your profit or loss on this contract if the price turns out to be $1,707 per metric ton at expiration?
Futures: Cocoa - 10 metric tons, $ per ton
Profit = 10 × ($1,707 - $1,696) = $110
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 23-1 Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Futures contract |
61.
|
Suppose you sell nine September silver futures contracts at the last price of the day as shown in the table below. What will be your profit or loss on this contract if the price turns out to be $12.09 per ounce at expiration?
Futures: Silver - 5,000 troy oz, U.S. cents per troy oz.
Since you sold contracts, you have a short position and thus incur a loss when the price rises.
Profit = 9 × 5,000 × ($11.525 - $12.09) = -$25,425 (loss) |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 23-2 Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Futures contract |
62.
|
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.
The call will be out of the money at expiration.
Loss = initial cost of contract = 15,000 (14.05/100) = $2,107.50 |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 23-3 Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.6 Topic: Futures options |
63.
|
Suppose a financial manager buys call options on 45,000 barrels of oil with an exercise price of $31 per barrel. She simultaneously sells a put option on 45,000 barrels of oil with the same exercise price of $31 per barrel. Her net profit per barrel is _____ if the price per barrel is $29 and _____ if the price per barrel is $35.
At $29: Value of call option position = $0; Value of put option position = -$2; Total = -$2 At $35: Value of call option position = $4; Value of put option position = $0; Total = $4
|
AACSB: Analytic
Blooms: Analyze Difficulty: 1 Easy EOC: 23-4 Learning Objective: 23-04 The payoffs of option contracts and how they are used to hedge risk. Section: 23.6 Topic: Call and put payoffs |
64.
|
Suppose your firm produces breakfast cereal and needs 65,000 bushels of corn in December for an upcoming promotion. You would like to lock in your costs today because you are concerned that corn prices might go up between now and December. To hedge your risk exposure, you could purchase corn futures contracts today effectively locking in a total settlement price of _____, based on the closing price shown in the table below.
Futures: Corn - 5,000 bu., U.S. cents per bu.
Number of contracts needed = 65,000/5,000 = 13 contracts
Contract value = 5,000 x (276/100) = $13,800 Total settlement price = 13 x $13,800 = $179,400 |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium EOC: 23-6 Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.4 Topic: Hedging with futures |
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