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

General Mills bought September call options for wheat with an exercise price of $2.80 at a price of $0.10 per bushel.If the price of wheat at the expiration is $2.90, what is the cost of one bushel of wheat for General Mills?

Consolidated Bakeries needs to acquire 100,000 bushels of wheat each quarter.The spot price is $3.75 per bushel but is expected to increase.Consolidated can purchase call options on 5,000 bushels of wheat with a strike price of $3.80 per bushel and a premium of $.03 per bushel.Calculate total expected savings from purchasing the options if wheat is forecasted to sell at $3.90 per bushel in three months.Conversely, how much did it cost to hedge if the wheat price is unchanged in three months?

What happens to the price of a futures contract as expiration draws closer?

Speculators are a necessary component of well-functioning futures markets.

A soybean oil contract calls for delivery of 60,000 pounds.What happens to the seller of a soybean futures contract at 16 cents per pound if the futures price closes the next day at 18 cents per pound?

Which of the following is a major reason for firms to engage in currency swaps?

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

Forward contracts are equivalent to tailor-made futures contracts.

Suppose that three days after taking out the futures contracts the price of September canola increases from $610 to $640 a tonne.What additional payments will be made by or to the farmer and the oil processor? What will be their remaining obligations at the end of this third day?

Which of the following is not correct concerning forward contracts? Forward contracts:

At the expiration of a futures contract, the futures price will be:

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $3.30 per bushel.At expiration the spot price of wheat is $2.80 per bushel.The hedger has:

If managers are rational, they will only hedge when they perceive that:

Futures contracts are standardized to expire at one time each year.

A firm can hedge the risk of upward movement in raw material prices by taking one of the following positions.

Managers are willing to pay a price to hedge because:

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?

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

Use the ordering of chicken wings to explain a forward contract.

The primary purpose of financial futures is to: