Question 1

How does a soybean farmer lock in a price of $5.40 per bushel when the cash price at harvest is only $4.90?

Accepted Answer

A) Profit in futures market to offset loss in cash market by selling futures contract at $5.40/bushel. 
B) Break even in both markets by buying a futures contract at $5.40/bushel. 
C) Profit in cash market to offset loss in futures market by buying futures contract at $5.40/bushel. 
D) Break even in both markets by selling a futures contract at $5.40/bushel. 
A) Profit in futures market to offset loss in cash market by selling futures contract at $5.40/bushel. 
B) Break even in both markets by buying a futures contract at $5.40/bushel. 
C) Profit in cash market to offset loss in futures market by buying futures contract at $5.40/bushel. 
D) Break even in both markets by selling a futures contract at $5.40/bushel. A

Question 2

The effect of marking a futures contract to market is similar to:

Accepted Answer

A) requiring daily payments from the contract buyer. 
B) requiring daily payments from the contract seller. 
C) closing the current position and opening a new position daily. 
D) imposing a daily fee on both buyers and sellers. 
A) requiring daily payments from the contract buyer. 
B) requiring daily payments from the contract seller. 
C) closing the current position and opening a new position daily. 
D) imposing a daily fee on both buyers and sellers. C

Question 3

Which of the following is the major difference between forward and futures contracts?

Accepted Answer

A) Futures contracts are more expensive than forward contracts. 
B) Forward contracts are available only for foreign currencies. 
C) Futures contracts are always delivered. 
D) Forward contracts are not marked to market. 
A) Futures contracts are more expensive than forward contracts. 
B) Forward contracts are available only for foreign currencies. 
C) Futures contracts are always delivered. 
D) Forward contracts are not marked to market. D

Question 4

Under what conditions can the use of options actually be detrimental to the firm's profitability?

Accepted Answer

In the case of buying option contracts,

Question 5

Regarding the profitability of options, it is impossible for a producer who sells put options to lose more than the exercise price agreed in the option contract.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following characteristics is similar in both futures and forward contracts?

Accepted Answer

A) Future asset transactions are conducted at an agreed price. 
B) Contracts are sold through organized exchanges. 
C) Contract terms are standardized. 
D) Price changes are settled daily. 
A) Future asset transactions are conducted at an agreed price. 
B) Contracts are sold through organized exchanges. 
C) Contract terms are standardized. 
D) Price changes are settled daily.

Question 7

A soybean farmer anticipates the harvest of 10,000 bushels but is concerned about the spot price that may exist at that time.He therefore sells two futures contracts (5,000 bu.each, @ $5.75 per bu.).Unfortunately, the farmer was overly pessimistic, and the spot price at contract expiration is $6.00 per bushel.Ignoring the premium paid, and making the simplifying assumption that the contract was only held for one "day," show the farmer's financial results of hedging.

Accepted Answer

Two contracts sold represent an obligati

Question 8

There is perhaps a negative connotation about the term "speculators." Discuss the essential purpose that they serve in providing the ability to hedge.

Accepted Answer

Although the futures exchange conducts a

Question 9

Discuss what it means for a futures contract to be "marked to market." If you provide an example, assume that the hedger has purchased a 5,000-bushel wheat contract at a price of $3.90 per bushel.

Accepted Answer

The process of marking to market records

Question 10

List the advantages and disadvantages of holding futures rather than the underlying commodity.

Accepted Answer

One advantage of holding futures is the

Question 11

Manufacturers who are concerned about volatile commodity prices often use option contracts to alter their risks.What is the worst-case scenario for a seller of put options on corn with a strike price of $2.25 per bushel?

Accepted Answer

A) If corn prices drop below $2.25 the option premium will be lost. 
B) If corn prices rise above $2.25 the option premium will be lost. 
C) Losses can be unlimited if prices drop sufficiently. 
D) Losses can be unlimited if prices rise sufficiently. 
A) If corn prices drop below $2.25 the option premium will be lost. 
B) If corn prices rise above $2.25 the option premium will be lost. 
C) Losses can be unlimited if prices drop sufficiently. 
D) Losses can be unlimited if prices rise sufficiently.

Question 12

A producer that is worried about the future price that will be available when the product is to be sold can hedge this price risk by:

Accepted Answer

A) buying a futures contract. 
B) selling a futures contract. 
C) buying a put option. 
D) selling a call option. 
A) buying a futures contract. 
B) selling a futures contract. 
C) buying a put option. 
D) selling a call option.

Question 13

Which of the following is not generally considered a benefit of hedging?

Accepted Answer

A) It reduces one or more aspects of business risk. 
B) It allows prices to be locked in advance. 
C) The costs of hedging are paid by the speculators. 
D) It can stabilize profits. 
A) It reduces one or more aspects of business risk. 
B) It allows prices to be locked in advance. 
C) The costs of hedging are paid by the speculators. 
D) It can stabilize profits.

Question 14

Which of the following would not be regulated in a standardized futures contract?

Accepted Answer

A) Quantity of asset to be traded. 
B) Quality of asset to be traded. 
C) The spot price. 
D) Date of settlement. 
A) Quantity of asset to be traded. 
B) Quality of asset to be traded. 
C) The spot price. 
D) Date of settlement.

Question 15

The most common use of hedging in finance is to reduce, rather than increase, risk.

Accepted Answer

A) True 
 B)False

Question 16

The seller of a copper futures contract noticed that her account was marked with a $500 gain yesterday.If the standardized contract requires delivery of 25,000 pounds of copper, what happened that day to the price of copper?

Accepted Answer

A) The price closed down $0.02 per pound. 
B) The price closed up $0.02 per pound. 
C) The price closed down $0.20 per pound. 
D) The price closed up $0.20 per pound. 
A) The price closed down $0.02 per pound. 
B) The price closed up $0.02 per pound. 
C) The price closed down $0.20 per pound. 
D) The price closed up $0.20 per pound.

Question 17

Which of the following futures contract holders is speculating?

Accepted Answer

A) A wheat farmer who sells wheat futures. 
B) A cattle rancher who buys live cattle futures. 
C) A candy maker who buys sugar futures. 
D) An oil producer who sells crude oil futures. 
A) A wheat farmer who sells wheat futures. 
B) A cattle rancher who buys live cattle futures. 
C) A candy maker who buys sugar futures. 
D) An oil producer who sells crude oil futures.

Question 18

How might a firm such as General Mills use options to control raw material prices for breakfast cereals?

Accepted Answer

A) Buy call options on commodities. 
B) Sell call options on commodities. 
C) Buy put options on commodities. 
D) Sell put options on commodities. 
A) Buy call options on commodities. 
B) Sell call options on commodities. 
C) Buy put options on commodities. 
D) Sell put options on commodities.

Question 19

A farmer can hedge the risk of downward movement in the price of the produce by taking one of the following positions.

Accepted Answer

A) Buying a call option. 
B) Selling a put option. 
C) Buying a put option. 
D) Buying a futures contract. 
A) Buying a call option. 
B) Selling a put option. 
C) Buying a put option. 
D) Buying a futures contract.

Question 20

Nestlé wishes to obtain a loan denominated in Swiss francs but considers the U.S.market to offer better terms.How can Nestlé accomplish this?

Accepted Answer

A) Borrow francs in Switzerland, exchange for dollars and arrange a currency swap 
B) Borrow francs in Switzerland, exchange for dollars and arrange an interest-rate swap 
C) Borrow dollars in U.S., exchange for francs and arrange an interest-rate swap 
D) Borrow dollars in U.S., exchange for francs and arrange a currency swap 
A) Borrow francs in Switzerland, exchange for dollars and arrange a currency swap 
B) Borrow francs in Switzerland, exchange for dollars and arrange an interest-rate swap 
C) Borrow dollars in U.S., exchange for francs and arrange an interest-rate swap 
D) Borrow dollars in U.S., exchange for francs and arrange a currency swap

Exam 26: Risk Management

How does a soybean farmer lock in a price of $5.40 per bushel when the cash price at harvest is only $4.90?

The effect of marking a futures contract to market is similar to:

Which of the following is the major difference between forward and futures contracts?

Under what conditions can the use of options actually be detrimental to the firm's profitability?

Regarding the profitability of options, it is impossible for a producer who sells put options to lose more than the exercise price agreed in the option contract.

Which of the following characteristics is similar in both futures and forward contracts?

There is perhaps a negative connotation about the term "speculators." Discuss the essential purpose that they serve in providing the ability to hedge.

Discuss what it means for a futures contract to be "marked to market." If you provide an example, assume that the hedger has purchased a 5,000-bushel wheat contract at a price of $3.90 per bushel.

List the advantages and disadvantages of holding futures rather than the underlying commodity.

Manufacturers who are concerned about volatile commodity prices often use option contracts to alter their risks.What is the worst-case scenario for a seller of put options on corn with a strike price of $2.25 per bushel?

A producer that is worried about the future price that will be available when the product is to be sold can hedge this price risk by:

Which of the following is not generally considered a benefit of hedging?

Which of the following would not be regulated in a standardized futures contract?

The most common use of hedging in finance is to reduce, rather than increase, risk.

The seller of a copper futures contract noticed that her account was marked with a $500 gain yesterday.If the standardized contract requires delivery of 25,000 pounds of copper, what happened that day to the price of copper?

Which of the following futures contract holders is speculating?

How might a firm such as General Mills use options to control raw material prices for breakfast cereals?

A farmer can hedge the risk of downward movement in the price of the produce by taking one of the following positions.

Nestlé wishes to obtain a loan denominated in Swiss francs but considers the U.S.market to offer better terms.How can Nestlé accomplish this?

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

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