FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 23: Risk Management: An Introduction to Financial Engineering

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 1

Multiple Choice

Review LaterAdd Note

Review Later

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

A) secondary trading.
B) open trading.
C) open-hedging.
D) cross-hedging.
E) perfect-hedging.

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

Correct Answer

verified

Show Answer

Question 2

Multiple Choice

Review LaterAdd Note

Review Later

Long-run financial risk:

A) can frequently be hedged on a permanent basis.
B) is best hedged on a division by division basis within a conglomerate.
C) is related more to near-term transactions than to advancements in technology.
D) generally results from changes in the underlying economics of a business.
E) can generally be hedged such that the financial viability of a firm is protected.

F) None of the above
G) B) and C)

Correct Answer

verified

Show Answer

Question 3

Multiple Choice

Review LaterAdd Note

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.

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?

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.

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

You expect to deliver 40,000 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.

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.

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?

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.

Suppose a financial manager buys call options on 45,000 barrels of oil with an exercise price of $30 per barrel. She simultaneously sells a put option on 45,000 barrels of oil with the same exercise price of $30 per barrel. Her net profit per barrel is _____ if the price per barrel is $29 and _____ if the price per barrel is $35.

Which of the following are futures exchanges? I. New York Mercantile Exchange II. New York Stock Exchange III. Chicago Board of Trade IV. NASDAQ

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.

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?

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.

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.

Which one of the following is true regarding forward contracts?

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?

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.

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.