Exam 30: Risk Management

Use the information for the question(s)below. Your firm faces an 8% chance of a potential loss of $50 million next year.If your firm implements new safety policies,it can reduce the chance of this loss to 3%,but the new safety policies have an upfront cost of $250,000.Suppose that the beta of the loss is 0 and the risk-free rate of interest is 5%. -If your firm is fully insured,the NPV of implementing the new safety policies is closest to:

The duration of a five-year bond with 8% annual coupons trading at par is closest to:

Which of the following statements is FALSE?

What is the duration of a five-year zero-coupon bond?

In reality,market imperfections exist that can raise the cost of insurance above the actuarially fair price and offset some of these benefits.These insurance market imperfections include all of the following EXCEPT:

Which of the following statements regarding commodities contracts is FALSE?

The Century 22 fund has invested in a portfolio of mortgage-backed securities that has a current market value of $245 million.The duration of this portfolio of mortgage-backed securities is 14.7 years.The fund has borrowed to purchase these securities,and the current value of its liabilities (i.e. ,the current value of the bonds Century 22 has issued)is $160 million.The duration of these liabilities is 5.4 years.What is the initial duration of the equity for the Century 22 fund?

Which of the following statements is FALSE?

Use the information for the question(s)below. Your firm faces an 8% chance of a potential loss of $50 million next year.If your firm implements new safety policies,it can reduce the chance of this loss to 3%,but the new safety policies have an upfront cost of $250,000.Suppose that the beta of the loss is 0 and the risk-free rate of interest is 5%. -If your firm is uninsured,the NPV of implementing the new safety policies is closest to:

Insurance that compensates for the loss or unavoidable absence of crucial employees in the firm is called:

What are some of the disadvantages of long-term supply contracts?

The risk that the firm will not have,or be able to raise,the cash required to meet the margin calls on its hedges is called:

Use the following information to answer the question(s)below. d'Anconia Copper expects to produce 500 million pounds of copper next year,with production costs of $0.75 per pound.Depending upon the economic conditions over the next year,d'Anconia Copper expects the price of copper next year to be either $1.40,$1.50,or $1.60 per pound,with each outcome being equally likely.d'Anconia Copper expects to sell all of its copper at the going price. -If the going price next year is $1.60 per pound,d'Anconia Copper's operating profit next year will be closest to:

To cover the costs that result if some aspect of the business causes harm to a third party or someone else's property,a firm would purchase:

For the following problem(s), please include a copy of the cumulative standard normal tables. -Suppose the current exchange rate is $1.42/€,the interest rate in the United States is 4.0%,the interest rate in the EU is 6%,and the volatility of the $/€ exchange rate is 20%.Using the Black-Scholes formula,the price of a three-month European call option on the Euro with a strike price of $1.45/€ will be closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Use the information for the question(s)below. Your firm faces an 8% chance of a potential loss of $50 million next year.If your firm implements new safety policies,it can reduce the chance of this loss to 3%,but the new safety policies have an upfront cost of $250,000.Suppose that the beta of the loss is 0 and the risk-free rate of interest is 5%. -What is the actuarially fair cost of full insurance?

To protect the firm against the loss of earnings if the business operations are disrupted due to fire,accident,or some other insured peril,a firm would purchase:

Luther Industries needs to borrow $50 million in cash.Currently long-term AAA rates are 9%.Luther can borrow at 9.75% given its current credit rating.Luther is expecting interest rates to fall over the next few years,so it would prefer to borrow at the short-term rates and refinance after rates have dropped.Luther management is afraid,however,that its credit rating may fall which could greatly increase the spread the firm must pay on new borrowings.How can Luther benefit from the expected decline in future interest rates without exposure to the risk that potential future changes to its credit ratings bring?