Exam 21: Risk Management

Use the table for the question(s) below. -Suppose oil futures prices are as given in the above table (price per barrel).Suppose you sell 100 crude oil futures contracts,each for 1000 barrels of crude oil,at the current futures price of $108 per barrel on day 0.What is your profit/loss in your margin account from the end of day 4 to the end of day 5?

Heinz uses 1000 tons of corn syrup each year as an ingredient in its tomato ketchup products.Heinz is concerned about the increase in prices of corn-based products and purchases a fixed-price contract to buy corn syrup at $20,000 per ton.What is the impact on earnings before taxes as opposed to no hedging if the price of corn is $25,000 per ton over the next year?

To protect the firm against the loss of earnings if the business operations are disrupted due to fire,accident,or some other insured peril,a firm would purchase

A gold mining firm sells futures contracts worth 1000 ounces at a price of $800 per ounce for maturity one year from today.If gold futures prices decrease to $798 per ounce,what is the cash flow to the producer?

A firm can borrow at a fixed rate of 7.25% on long-term loans.If it swaps its long-term payments so that it receives 6.5% and pays a floating rate of LIBOR,what is the rate of interest on its borrowing?

The risk of fire at a car assembly plant is 0.3%.If the firm will receive a payment of $20 million in one year if there is a fire during the year,what is the net present value (NPV)of purchasing insurance if the firm will face financial distress costs of $6 million and issuance costs of $1 million in the event of a loss if the risk-free rate is 5%?

A firm estimates that the loss from a weather-related closing is $40 million and the probability of occurrence is 0.1% over the next year.If claims are paid at the end of the year,the annual risk-free rate is 5%,the market risk premium is 6%,and the beta of these losses is 0.9,compute the insurance premium.

Heinz uses 2000 tons of corn syrup each year as an ingredient in its tomato ketchup products.Heinz is concerned about the increase in prices of corn-based products and purchases a fixed-price contract to buy corn syrup at $20,000 per ton.What is the impact on earnings before taxes as opposed to no hedging if the price of corn is $15,000 per ton over the next year?

A gold mining firm sells futures contracts worth 1000 ounces at a price of $700 per ounce for maturity one year from today.If gold futures prices increase to $702 per ounce,what is the cash flow to the producer?

A restaurant decides to insure itself against the risk of fire.The insurance company estimates that the probability of a fire is 0.1% and the expected payment should a fire occur is $10 million.If the risk-free rate is 4%,the expected return on the market is 9%,and the beta of the risk is -3,what is the actuarially fair insurance premium?

The six month LIBOR rate for a reference period is 6.8% (annualized).The fixed six-month coupon rate for the same period is 3.9%.Compute the payment to the floating-rate payer if the notional principal is $100 million.

A firm estimates that the loss from a weather-related closing is $20 million and the probability of occurrence is 0.2% over the next year.If claims are paid at the end of the year,the annual risk-free rate is 5%,the market risk premium is 6%,and the beta of these losses is 0.7,compute the insurance premium.

A ________ contract is often used for hedging and is an exchange-traded agreement to purchase an asset at some future date at a price that is locked in today.

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

What is a margin call?

A provision in an insurance policy that limits the amount of loss that the policy covers regardless of the extent of the damage is known as a

A firm can borrow at a floating rate of LIBOR + 2.5% on short-term loans.It swaps its short-term payments so that it receives LIBOR + 1.25% and pays a fixed rate of 3.75%.If the notional principal is $100 million,what is the amount the firm pays under the swap?

A manufacturer of breakfast cereal is concerned about corn prices.The firm anticipates needing 1 million bushels of corn in one month.The current price of corn is $6.50 per bushel and the futures price for delivery in one month is $7.00 per bushel.The cost to store the corn for 1 month is $100,000.What should the firm do?

The risk of fire at a car assembly plant is 0.1%.If the firm will receive a payment of $40 million in one year if there is a fire during the year,what is the net present value (NPV)of purchasing insurance if the firm will face financial distress costs of $7 million and issuance costs of $1 million in the event of a loss if the risk-free rate is 5%?

What is the percentage change in a 5-year zero-coupon bond with a duration of 5 years,when interest rates increase from 9% to 10%?