Question 1

How much will you pay per pound for a September 130 orange juice futures call option?
Orange juice - 15,000 lbs:
U.S.cents per lb.

Accepted Answer

A) $0.0055 
B) $0.0065 
C) $0.0550 
D) $0.0650 
E) $0.1135 
A) $0.0055 
B) $0.0065 
C) $0.0550 
D) $0.0650 
E) $0.1135 C

Question 2

A bakery generally enters into a forward contract in wheat as a:

Accepted Answer

A) hedger. 
B) speculator. 
C) spot trader. 
D) broker. 
E) spectator. 
A) hedger. 
B) speculator. 
C) spot trader. 
D) broker. 
E) spectator. A

Question 3

Farmer Mac owns a large orange grove in Florida.The value of his business is directly related to the price of oranges.Which one of the following is a graphical representation of this price-value relationship?

Accepted Answer

A) exchange line 
B) net present value profile 
C) risk profile 
D) market line 
E) return grid 
A) exchange line 
B) net present value profile 
C) risk profile 
D) market line 
E) return grid C

Question 4

Steve recently sold an option that requires him to purchase 100 shares of Omega stock at $40 a share should the option owner decide to exercise the option.What type of option contract did Steve sell?

Accepted Answer

A) futures option 
B) call option 
C) put option 
D) straddle 
E) strangle 
A) futures option 
B) call option 
C) put option 
D) straddle 
E) strangle

Question 5

Suppose your firm produces breakfast cereal and needs 65,000 bushels of corn in December for an upcoming promotion.You would like to lock in your costs today because you are concerned that corn prices might go up between now and December.To hedge your risk exposure,you could purchase corn futures contracts today effectively locking in a total settlement price of _____,based on the closing price shown in the table below. Futures:
Corn - 5,000 bu.,U.S.cents per bu.

Accepted Answer

A) $163,800 
B) $164,125 
C) $174,238 
D) $179,400 
E) $183,463 
A) $163,800 
B) $164,125 
C) $174,238 
D) $179,400 
E) $183,463

Question 6

You believe the price of a stock is going to decline within the next three months.Which one of the following option payoff profiles will reflect a profit if your belief is correct?

Accepted Answer

A) buying a call 
B) selling a call 
C) buying a put 
D) selling a put 
A) buying a call 
B) selling a call 
C) buying a put 
D) selling a put

Question 7

Most of the evidence to-date indicates that firms with which two of the following characteristics are most apt to frequently use derivatives?
I.firms with low financial distress costs
II.firms with high financial distress costs
III.firms with easy access to capital markets
IV.firms with constrained access to capital markets

Accepted Answer

A) I and III only 
B) I and IV only 
C) II and III only 
D) II and IV only 
E) III and IV only 
A) I and III only 
B) I and IV only 
C) II and III only 
D) II and IV only 
E) III and IV only

Question 8

Suppose you purchase the November call option on orange juice futures with a strike price of 150 at the price shown in the table below.What will be your profit or loss on this contract if the price of orange juice futures is $0.616 per pound at expiration of the option contract?
Futures Options
Orange juice:
15,000 lbs,U.S.cents per lb.

Accepted Answer

A) loss of $2,107.50 
B) loss of $1,717.50 
C) no profit or loss 
D) profit of $1,717.50 
E) profit of $2,107.50 
A) loss of $2,107.50 
B) loss of $1,717.50 
C) no profit or loss 
D) profit of $1,717.50 
E) profit of $2,107.50

Question 9

What is cross-hedging?
 Why do you suppose firms use this method of risk management?
 What are some of the drawbacks?

Accepted Answer

Cross-hedging is hedging an asset with c

Question 10

Murray's can borrow money at a fixed rate of 10.5 percent or a variable rate set at prime plus 2.25 percent.Fred's can borrow money at a variable rate of prime plus 1.5 percent or a fixed rate of 12 percent.Murray's prefers a variable rate and Fred's prefers a fixed rate.Given this information,which one of the following statements is correct?

Accepted Answer

A) After swapping interest rates with Fred's, Murray's may be able to pay prime plus 2 percent. 
B) Both companies can profit in a swap which will allow Murray's to pay a variable rate of prime plus one percent. 
C) Fred's will end up with a fixed rate of 10 percent. 
D) Fred's has the best chance of profiting if it does an interest rate swap with Murray's. 
E) There are no terms under which Murray's and Fred's can swap interest rates. 
A) After swapping interest rates with Fred's, Murray's may be able to pay prime plus 2 percent. 
B) Both companies can profit in a swap which will allow Murray's to pay a variable rate of prime plus one percent. 
C) Fred's will end up with a fixed rate of 10 percent. 
D) Fred's has the best chance of profiting if it does an interest rate swap with Murray's. 
E) There are no terms under which Murray's and Fred's can swap interest rates.

Question 11

Farmer Jones raises several hundred acres of corn and would suffer a significant loss should the price of corn decline at harvest time.Which one of the following would he be doing if he purchased financial securities to offset this price risk?

Accepted Answer

A) abating 
B) deriving 
C) hedging 
D) forwarding 
E) manipulating 
A) abating 
B) deriving 
C) hedging 
D) forwarding 
E) manipulating

Question 12

An agreement that grants its owner the right,but not the obligation,to buy or sell a specific asset at a specific price for a set period of time is called a(n)_____ contract.

Accepted Answer

A) option 
B) forward 
C) futures 
D) swap 
E) spot 
A) option 
B) forward 
C) futures 
D) swap 
E) spot

Question 13

Which one of the following actions will provide you with the right,but not the obligation,to sell the underlying asset at a specified price during a specified period of time?

Accepted Answer

A) purchase of a call option 
B) sale of a call option 
C) purchase of a put option 
D) sale of a put option 
E) swap 
A) purchase of a call option 
B) sale of a call option 
C) purchase of a put option 
D) sale of a put option 
E) swap

Question 14

Which one of the following obligates you only on the expiration date to sell an asset at the strike price if the option is exercised?

Accepted Answer

A) American call 
B) American put 
C) European call 
D) European put 
E) European swap 
A) American call 
B) American put 
C) European call 
D) European put 
E) European swap

Question 15

If a firm creates an interest rate collar on a variable rate loan,then the rate the firm pays will always:

Accepted Answer

A) remain constant at the average of the floor and cap rates. 
B) remain constant at the floor rate. 
C) remain constant at the cap rate. 
D) be higher than, or equal to, the cap but lower than, or equal to, the floor. 
E) be higher than, or equal to, the floor but lower than, or equal to, the cap. 
A) remain constant at the average of the floor and cap rates. 
B) remain constant at the floor rate. 
C) remain constant at the cap rate. 
D) be higher than, or equal to, the cap but lower than, or equal to, the floor. 
E) be higher than, or equal to, the floor but lower than, or equal to, the cap.

Question 16

Which one of the following statements is correct in relation to a firm's short-run financial risk?

Accepted Answer

A) Short-run financial risk results from permanent changes in prices due to new technology. 
B) A financially sound firm can become financially distressed as the result of its short-run exposure to financial risk. 
C) Each segment of a business should be responsible for hedging its own short-run financial risk. 
D) Short-run financial risk is defined as temporary price changes which result directly from natural disasters, such as tornadoes, droughts, and floods. 
E) Thus far, hedging techniques have been unsuccessful in reducing short-run financial risk. 
A) Short-run financial risk results from permanent changes in prices due to new technology. 
B) A financially sound firm can become financially distressed as the result of its short-run exposure to financial risk. 
C) Each segment of a business should be responsible for hedging its own short-run financial risk. 
D) Short-run financial risk is defined as temporary price changes which result directly from natural disasters, such as tornadoes, droughts, and floods. 
E) Thus far, hedging techniques have been unsuccessful in reducing short-run financial risk.

Question 17

A payoff profile:

Accepted Answer

A) determines the price of an option contract. 
B) determines whether a forward or a futures contract is needed. 
C) applies only to contract sellers. 
D) determines the price of a collar. 
E) illustrates potential gains and losses. 
A) determines the price of an option contract. 
B) determines whether a forward or a futures contract is needed. 
C) applies only to contract sellers. 
D) determines the price of a collar. 
E) illustrates potential gains and losses.

Question 18

A hedge between which two of the following firms is most apt to reduce each firm's financial risk exposure?

Accepted Answer

A) wheat farmer and bakery 
B) oil producer and coal miner 
C) wheat grower and pharmaceutical firm 
D) pastry bakery and cotton farmer 
E) shoe manufacturer and coat manufacturer 
A) wheat farmer and bakery 
B) oil producer and coal miner 
C) wheat grower and pharmaceutical firm 
D) pastry bakery and cotton farmer 
E) shoe manufacturer and coat manufacturer

Question 19

You are the purchasing agent for a major cookie company.You anticipate that your firm will need 20,000 bushels of oats in December.You decide to hedge your position today and did so at the closing price of the day.Assume that the actual market price turns out to be 228.0 on the day you actually buy the oats.How much did you gain or lose by hedging your position?
Oats - 5,000 bu.:
Cents per bu.

Accepted Answer

A) lost $4,000 
B) lost $400 
C) saved $40 
D) saved $400 
E) saved $4,000 
A) lost $4,000 
B) lost $400 
C) saved $40 
D) saved $400 
E) saved $4,000

Question 20

Which two of the following are key differences between an option contract and a forward contract?
I.option contracts can be resold but forward contracts cannot
II.the option price is determined at settlement while the forward price is determined when the contract is initiated
III.the rights and obligations of the buyer
IV.cost when contract initiated

Accepted Answer

A) I and III only 
B) II and IV only 
C) III and IV only 
D) I and II only 
E) II and III only 
A) I and III only 
B) II and IV only 
C) III and IV only 
D) I and II only 
E) II and III only

Exam 23: Enterprise Risk Management

How much will you pay per pound for a September 130 orange juice futures call option? Orange juice - 15,000 lbs: U.S.cents per lb.

A bakery generally enters into a forward contract in wheat as a:

Farmer Mac owns a large orange grove in Florida.The value of his business is directly related to the price of oranges.Which one of the following is a graphical representation of this price-value relationship?

Steve recently sold an option that requires him to purchase 100 shares of Omega stock at $40 a share should the option owner decide to exercise the option.What type of option contract did Steve sell?

You believe the price of a stock is going to decline within the next three months.Which one of the following option payoff profiles will reflect a profit if your belief is correct?

What is cross-hedging? Why do you suppose firms use this method of risk management? What are some of the drawbacks?

Farmer Jones raises several hundred acres of corn and would suffer a significant loss should the price of corn decline at harvest time.Which one of the following would he be doing if he purchased financial securities to offset this price risk?

An agreement that grants its owner the right,but not the obligation,to buy or sell a specific asset at a specific price for a set period of time is called a(n)_____ contract.

Which one of the following actions will provide you with the right,but not the obligation,to sell the underlying asset at a specified price during a specified period of time?

Which one of the following obligates you only on the expiration date to sell an asset at the strike price if the option is exercised?

If a firm creates an interest rate collar on a variable rate loan,then the rate the firm pays will always:

Which one of the following statements is correct in relation to a firm's short-run financial risk?

A payoff profile:

A hedge between which two of the following firms is most apt to reduce each firm's financial risk exposure?

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

Filters