Exam 30: Risk Management

A currency forward contract specifies all of the following,EXCEPT:

Which of the following statements is FALSE?

Which of the following statements regarding futures contracts is FALSE?

Farmville Industries is a major agricultural firm and is concerned about the possibility of drought impacting corn production.In the event of a drought,Farmville Industries anticipates a loss of $75 million.Suppose the likelihood of a drought is 10% per year,and the beta associated with such a loss is 0.4.If the risk-free interest rate is 5% and the expected return on the market is 10%,then what is the actuarially fair insurance premium?

For the following problem(s), please include a copy of the cumulative standard normal tables. -Suppose the current exchange rate is $1.62/£,the interest rate in the United States is 5.25%,the interest rate in the United Kingdom is 4%,and the volatility of the $/£ exchange rate is 18%.Using the Black-Scholes formula,the price of a six-month European call option on the British pound with a strike price of $1.60/£ will be closest to:

Your oil refinery will need to buy 250,000 barrels of crude oil in one week and it is worried about crude oil prices.Suppose you go long 250 crude oil futures contracts,each for 1000 barrels of crude oil,at the current futures price of $68 per barrel.Suppose futures prices change each day over the next week as follows: What is the daily and cumulative mark to market profit or loss (in dollars)that you will have on each of the next five days?

Which of the following statements is FALSE?

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 $1.40 per pound,d'Anconia Copper's operating profit next year will be closest to:

In June 2016,the spot exchange rate for the British Pound was $1.4255/£ .Suppose that at the same time Luther Industries entered into a contract to purchase goods with a price of £400,000 to be delivered in one year.There is a one-year call option contract available to Luther which will allow the company to purchase £10,000 for $1.50/£.If Luther purchases 40 option contracts,and the spot rate at the time the contract is due is $1.3465/£,how much will Luther pay for the goods?

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%. -Assuming that your firm will purchase insurance,what is the minimum-size deductible that would leave your firm with an incentive to implement the new safety policies?

In December 2005,the spot exchange rate for the British Pound was $1.7188/£ and the one-year forward rate was $1.8675/£.Suppose that at the same time Luther Industries entered into a contract to purchase goods with a price of £375,000 to be delivered in one year.Simultaneously Luther entered into a one-year forward contract to purchase £375,000.At the time the contract payment was due,the spot exchange rate was $1.9975/£.What is the amount of the payment in U.S.dollars that Luther Industries paid?

Which of the following statements regarding long-term supply contracts is FALSE?

Use the following information to answer the question(s) below. Rearden Metal imports ore from South America. Assume that it is 2016 and Rearden Metal is worried that the South American mines may enter into a long-term contract with the Chinese to sell all of their ore output to China, hence cutting off Rearden Metal's supply. In the event of such a contract with the Chinese, Rearden Metal will face much higher costs for its raw materials causing its operating profits to decline substantially and its marginal tax rate to fall from its current level of 35% down to 10%. An insurance firm has agreed to write a trade insurance policy that will pay Rearden Metal $2,500,000 in the event of the South American supply of ore being cut off. The chance of the South American supply being cut off is estimated to be 20%, with a beta of -2.0. The risk-free rate of interest is 4% and the return on the market is estimated to be 12%. -Rearden's NPV for purchasing this policy is closest to:

The cash-and-carry strategy consists of all of the following simultaneous trades,EXCEPT:

Use the following information to answer the question(s)below. You are a risk manager for Security First Trust Savings and Loan (SFTSL).SFTSL's balance sheet is as follows (in millions of dollars): The duration of the auto loans is three years and the duration of the mortgages is eight years.Both cash reserves and checking and savings have zero duration.The CDs have a duration of two years and the long-term financing has a ten-year duration. -If interest rates are currently 5%,but fall to 4%,your estimate of the approximate change in SFTSL equity is closest to:

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 d'Anconia Copper enters into a contract to supply copper to end users at an average price of $1.48 per pound,then d'Anconia Copper's operating profit next year will be closest to:

In June 2016,the spot exchange rate for the British Pound was $1.4255/£ .Suppose that at the same time Luther Industries entered into a contract to purchase goods with a price of £400,000 to be delivered in one year.There is a one-year option call contract available to Luther which will allow the company to purchase £10,000 for $1.50/£.If Luther purchases 40 option contracts,and the spot rate at the time the contract is due is $1.8725/£,how much will Luther pay for the goods?

Which of the following statements is FALSE?

The risk that arises because the value of the futures contract will not be perfectly correlated with the firm's exposure is called:

In December 2005,the spot exchange rate for the British Pound was $1.7188/£.Suppose that at the same time the one-year interest rate in the United States was 4.85% and the one-year interest rate in Great Britain was 3.15%.Based on these rates,what forward exchange rate is consistent with no arbitrage.