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Exam 23: Enterprise Risk Management

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Question 31

Multiple Choice

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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?

A) futures option
B) call option
C) put option
D) straddle
E) strangle

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

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Question 32

Multiple Choice

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

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)

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Question 33

Multiple Choice

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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?

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.

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

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

Which one of the following is the primary difference between a swap contract and a forward contract?

A forward contract:

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?

A swap dealer in the U.S.:

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

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

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.

By hedging financial risk,a firm can:

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?

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

A payoff profile:

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?

A bakery generally enters into a forward contract in wheat as a:

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?