Exam 30: Risk Management

Which of the following statements regarding currency options is FALSE?

Like most foreign exchange rates,the dollar/euro rate is a floating rate,which means it changes constantly depending on the quantity supplied and demanded for each currency in the market.The supply and demand for each currency is driven directly by all of the following factors,EXCEPT:

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?

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.What is the amount of the payment in U.S.dollars that Luther Industries will have to make in one year to pay for their goods?

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%. -The actuarially fair premium for this insurance policy is closest to:

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. -The duration of SFTSL's equity is closest to:

Which of the following statements is FALSE?

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. -Because of a new program called Kash for Klunkers,SFTSL experiences a rash of auto loan prepayments,reducing the size of the auto loan portfolio from $200 million to $100 million and increasing the cash reserves to $200 million.After these prepayments,the duration of SFTSL's equity is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

To insure their assets against hazards such as fire,storm damage,vandalism,earthquakes,and other natural and environmental risks,firms commonly purchase:

Which of the following statements is FALSE?

Which of the following statements is FALSE?