Exam 23: Enterprise Risk Management

This morning a national bakery agreed to pay a farmer $7.10 a bushel for 5,000 bushels of wheat that the farmer will deliver to the bakery four months from now. Payment will be made at the time of delivery. What is this legally binding agreement called?

Browning Enterprises currently has all fixed-rate debt. The firm would like to convert part of this to floating-rate debt. Which one of the following will accomplish this for the firm?

A U.S. bank has an agreement with a German bank to exchange $500,000 for €397,000 on the first day of each of the next three calendar quarters. This agreement is best described as a:

All of the following are futures exchanges except: 

An agreement that grants its owner the right, but not the obligation, to buy or sell a specific asset at a specific price for a set period of time is called a(n) ________ contract.

Which one of the following statements is correct in relation to a firm's short-run financial risk?

Steve has an option with a payoff profile that depicts a line that is constant at zero up until some point after which the line slopes downward. What type of action did Steve take to obtain this profile?

Which type of insurance helps replace a company's income during the time period the company is closed due to a major hurricane?

Farmer Jones raises several hundred acres of corn and would suffer a significant loss should the price of corn decline at harvest time. Which one of the following would he be doing if he purchased financial securities to offset this price risk?

Which type of risk is related to damages arising from a natural disaster?

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 shares of a stock and believe the stock price will increase in the future. However, you realize the stock price could decline and want to hedge that risk. Which one of the following option positions should you take to create the desired hedge?

You believe the price of an asset is going to increase within the next three months. Which one of the following payoff profiles for an option on that asset will reflect a profit if your belief is correct?

American option contracts:

Which one of the following is true regarding forward contracts?

A forward contract:

Ethanol futures contracts are based on 29,000 gallons and are priced in dollars per gallon. Assume the end-of-day report on a contract show prices of: Open 2.220, High 2.231, Low 2.181, and Settle 2.186. What is the maximum profit that an investor could have earned by buying and selling one of these contracts on this day?

Suppose an investor buys a call option on 45,000 barrels of oil with an exercise price of $51 per barrel and simultaneously sells a put option on 45,000 barrels of oil with the same exercise price of $51 per barrel. Her net payoff per barrel on these option contracts is ________ if the market price per barrel is $49 and ________ if the price per barrel is $55.

Futures contracts on palladium are based on 50 troy ounces and are priced in dollars per troy ounce. Assume today's open price on one May contract was 758.90 and the settle price was 756.10. You own three May contracts which you purchased at a quote of 749.30. What is your total profit or loss to date?

An interest rate cap is actually a: