Exam 23: Enterprise Risk Management

Farmer Mac owns a large orange grove in Florida. The value of his business is directly related to the price of oranges. Which one of the following is a graphical representation of this price-value relationship?

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

If a firm creates an interest rate collar on a variable rate loan, then the rate the firm pays will always:

Dog's can borrow money at either a fixed rate of 8.25 percent or a variable rate set at prime plus .5 percent. Cat's can borrow money at a variable rate of prime plus 1 percent or a fixed rate of 8 percent. Dog's prefers a fixed rate and Cat's prefers a variable rate. Given this information, which one of the following statements is correct?

You anticipate your firm will need 20,000 bushels of oats in December so you hedged your position today at the closing price when the daily price quotes were: Open 222, High 225.50, Low 223.50, and Settle 218.50. Assume the actual market quote turns out to be 228.70 on the day you actually acquire the oats. Oats futures contracts are based on 5,000 bushels and priced in cents per bushel. What was your gain or loss from hedging your position?

The buyer of an option contract:

Gold futures contracts are based on 100 troy ounces and are priced in dollars per troy ounce. You own three November contracts. At the end of trading today, the market report reflected these prices: Open 1293.00, High 1295.00, Low 1286.00, and Settle 1296.10. What is the value of your contracts at the market close today?

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?

Sue has a contract that grants her a right that she may or may not decide to exercise. This right increases in value as the value of the asset underlying her contract declines. Which one of these did she do to create this situation?