Question 1

You anticipate your firm will need 20,000 bushels of oats in December so you hedged your position today at the closing price when the daily price quotes were: Open 222, High 225.50, Low 223.50, and Settle 218.50. Assume the actual market quote turns out to be 228.70 on the day you actually acquire the oats. Oats futures contracts are based on 5,000 bushels and priced in cents per bushel. What was your gain or loss from hedging your position?

Accepted Answer

A)   −$510
B)   $2,040
C)   $510
D)   $1,060
E)   −$2,040F) C) and D)
G) A) and D)

Question 2

Which one of the following statements concerning option payoffs is correct?

Accepted Answer

A)   The buyer of a call profits when the exercise price exceeds the market price.
B)   The buyer of a call profits when the strike price exceeds the exercise price.
C)   A put will only be exercised if both the seller and the buyer can profit.
D)   Both the buyer and the seller profit when a call is exercised.
E)   The seller of a put incurs a loss when a put is exercised.F) B) and E)
G) A) and B)

Question 3

The buyer of an option contract:

Accepted Answer

A)   receives the option premium in exchange for an obligation to either buy or sell an underlying asset.
B)   pays an option premium in exchange for a right to buy or sell an underlying asset during a specified period of time.
C)   pays the strike price at the time the option is purchased and in exchange receives the right to exercise the option at any time during the option period.
D)   receives the option premium in exchange for guaranteeing the purchase or sale of an underlying asset if called upon to do so.
E)   pays the option premium in exchange for receiving the strike price at a later date.F) D) and E)
G) A) and B)

Question 4

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

Accepted Answer

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 B)
G) A) and E)

Question 5

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?

Accepted Answer

A)   After swapping interest rates with Fred's, Murray's may be able to pay prime plus 2 percent.
B)   Both companies can profit in a swap that will allow Murray's to pay a variable rate of prime plus one percent.
C)   Fred's will end up with a fixed rate of 10 percent.
D)   Fred's has the best chance of profiting if it does a currency swap with Murray's.
E)   There are no terms under which Murray's and Fred's can swap interest rates.F) B) and C)
G) A) and D)

Question 6

Sue has a contract that grants her a right that she may or may not decide to exercise. This right increases in value as the value of the asset underlying her contract declines. Which one of these did she do to create this situation?

Accepted Answer

A)   Purchased a call option
B)   Purchased a put option
C)   Purchased and simultaneously sold the same call option
D)   Sold a call option
E)   Sold a put optionF) A) and D)
G) None of the above

Question 7

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?

Accepted Answer

A)   Exchange line
B)   Net present value profile
C)   Risk profile
D)   Market line
E)   Return gridF) B) and C)
G) A) and B)

Question 8

Dog's can borrow money at either a fixed rate of 8.25 percent or a variable rate set at prime plus .5 percent. Cat's can borrow money at 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?

Accepted Answer

A)   After a swap with Cat's, Dog's could end up paying a fixed rate of 7.8 percent.
B)   Cat's should end up paying the prime rate if it agrees to an interest rate swap with Dog's.
C)   Both firms will profit if they swap an 8.15 percent fixed rate for a prime plus .75 percent variable rate.
D)   Dog's will end up paying no more than 7.75 percent as a fixed rate after a swap with Cat's.
E)   Dog's and Cat's cannot swap interest rates in a manner that will be profitable for both firms.F) None of the above
G) C) and D)

Question 9

Gold futures contracts are based on 100 troy ounces and are priced in dollars per troy ounce. You own three November contracts. At the end of trading today, the market report reflected these prices: Open 1293.00, High 1295.00, Low 1286.00, and Settle 1296.10. What is the value of your contracts at the market close today?

Accepted Answer

A)   $129,610
B)   $259,000
C)   $258,600
D)   $388,830
E)   $360,460F) A) and E)
G) None of the above

Exam 23: Enterprise Risk Management

Correct Answer
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Correct Answer
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Correct Answer
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Sue has a contract that grants her a right that she may or may not decide to exercise. This right increases in value as the value of the asset underlying her contract declines. Which one of these did she do to create this situation?

Correct Answer
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The buyer of an option contract:

Correct Answer
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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:

Correct Answer
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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?

Correct Answer
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Correct Answer
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Which one of the following statements concerning option payoffs is correct?

Correct Answer
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Exam 23: Enterprise Risk Management

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Sue has a contract that grants her a right that she may or may not decide to exercise. This right increases in value as the value of the asset underlying her contract declines. Which one of these did she do to create this situation?

Correct AnswerverifiedShow Answer

The buyer of an option contract:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following statements concerning option payoffs is correct?

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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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