Exam 24: Risk Management

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:

A cotton producer has purchased cotton futures that involve 50,000 pounds of cotton at a price of $0.60 per pound.By contract expiration the producer finds that cotton prices have declined by $0.07 per pound.As a result of the futures contracts,the producer will:

Hedging is foolish unless you have reason to believe that the odds are stacked against your favor.

A farmer hedged his risk by buying put options on wheat with an exercise price of $2.70 at a price of $0.14 per bushel.If the price of wheat at the expiration of the contract is $2.70,what is the net revenue from each bushel of wheat?

Which of the following statements is correct for an interest rate swap?

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

In an interest rate swap,borrowers typically exchange fixed-rate payments in one currency for:

A farmer who sells a futures contract is betting that prices will _____ at the expiration of the contract.

You enter into a forward contract to take delivery of 1 million euros 3 months from now.What happens to the price you will pay at expiration if marks depreciate during the contract?

Which of the following futures contract holders is speculating?

A survey of the world's 500 largest companies found that almost all the companies use derivatives in some way to manage their risk.

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

The process of marking a futures contract to market means that:

One distinguishing difference between the buyer of a futures contract and the buyer of an option contract is that the futures buyer:

A large dental lab plans to purchase 1,000 ounces of gold in 1 month.Assume again that gold prices can be $280,$300,or $320 an ounce. a.What will total expenses be if the firm purchases call options on 1,000 ounces of gold with an exercise price of $300 an ounce? The options cost $3 per ounce. b.What will total expenses be if the firm purchases call options on 1,000 ounces of gold with an exercise price of $295 an ounce? These options cost $7 per ounce.

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

Costs of financial distress arise from disruption to normal business operations as well as from the effect that financial distress has on the firm's investment decisions.

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

Hershey's Chocolate is concerned about cocoa prices prior to building inventory for Halloween sales.Analysts project that price per ton could vary from $1,250 to $1,500.A September call option can be purchased with a $1,300 strike price for a premium of $145.What is Hershey's worst-case scenario if it purchases these options?

Risk policies are the same across companies.