Exam 26: What We Do and Do Not Know About Finance

What form of hedging would you suggest for a producer that wishes to be protected from future price decreases but wants to benefit from any future price increases?

The seller of a pork bellies futures contract at $.41 per pound noted that the closing price of pork bellies was $0.44 today.What will happen to this contract, which requires delivery of 40,000 of pork bellies at expiration?

Put options can be thought of as insurance policies for commodity producers.

122.Company A can borrow at a fixed rate of 9.5% and variable rate of Prime plus 1%.Company A prefers a fixed rate.Company B can borrow at 8% fixed rate and Prime plus 2%.Company B prefers a variable rate.Determine whether an interest rate swap will be beneficial to both parties.

What has happened to cause a $250 loss to be marked to the margin account of a futures contract buyer?

Both the seller and the buyer in a futures contract are required to put up margins.

A farmer can avoid delivery on a futures contract by buying an offsetting futures contract.

ABC Corp.entered into a currency swap with its bank, providing that ABC borrows $5 million at 10 percent and swaps for a 12 percent yen loan.The spot exchange rate is *105$.If interest only is to be repaid on an annual basis, how much does ABC pay annually to the bank?

A farmer can reduce the quantity risk by buying a futures contract.

The purpose of a margin account for a futures contract is to:

All options are standardized, exchange-traded financial instruments.

Exchange traded futures contracts allow the seller to choose the place of delivery for the commodity.

Unlike options, a futures contract binds the buyer to buy the commodity at a fixed price.

Which of the following is not correct concerning the financial futures markets?

Engaging itself in a swap contract, a firm might agree to make a series of regular payments in one currency in return for receiving a series of payments in another currency.

121.Company X can borrow at 12% fixed and Prime plus 1.6%.Company Y can borrow at 10% fixed rate and Prime plus 1%.Determine whether an interest rate swap will be of benefit to both parties.

A speculator takes a position in the futures market without holding an offsetting position in the commodity market.

Because most hedging acts to reduce risk, managers should expect that hedging will:

Why are most futures contracts not settled through delivery of the product?

All financial futures contracts are written on a deliverable asset.