Exam 30: Risk Management

In reality market imperfections exist that can raise the cost of insurance above the actuarially fair price and offset some of these benefits.These insurance market imperfections include all of the following EXCEPT:

If d'Anconia Copper enters into a contract to supply copper to end users at an average price of $1.48 per pound,then d'Anconia Copper's operating profit next year will be closest to:

A currency forward contract specifies all of the following EXCEPT:

Rearden's NPV for purchasing this policy is closest to:

If the going price next year is $1.60 per pound,d'Anconia Copper's operating profit next year will be closest to:

Insurance that compensates for the loss or unavoidable absence of crucial employees in the firm is called:

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

What is the duration of a five-year zero-coupon bond?

Which of the following statements is FALSE?

Luther Industries needs to borrow $50 million in cash.Currently long-term AAA rates are 9%.Luther can borrow at 9.75% given its current credit rating.Luther is expecting interest rates to fall over the next few years,so it would prefer to borrow at the short-term rates and refinance after rates have dropped.Luther management is afraid,however,that its credit rating may fall which could greatly increase the spread the firm must pay on new borrowings.How can Luther benefit from the expected decline in future interest rates without exposure to the risk of the potential future changes to its credit ratings bring?

Your oil refinery will need to buy 250,000 barrels of crude oil in one week and it is worried about crude oil prices.Suppose you go long 250 crude oil futures contracts,each for 1000 barrels of crude oil,at the current futures price of $68 per barrel.Suppose futures prices change each day over the next week as follows: What is the daily and cumulative mark to market profit or loss (in dollars)that you will have on each of the next five days?

Which of the following statements is FALSE?

The Century 22 fund has invested in a portfolio of mortgaged backed securities that has a current market value of $245 million.The duration of this portfolio of mortgaged back securities is 14.7 years.The fund has borrowed to purchase these securities,and the current value of its liabilities (i.e. ,the current value of the bonds Century 22 has issued)is $160 million.The duration of these liabilities is 5.4 years.What is the initial duration of the equity for the Century 22 fund?

Suppose the current exchange rate is $1.42/€,the interest rate in the United States is 4.0%,the interest rate in the EU is 6%,and the volatility of the $/€ exchange rate is 20%.Using the Black-Scholes formula,the price of a three-month European call option on the Euro with a strike price of $1.45/€ will be closest to:

If interest rates are currently 5%,but fall to 4%,your estimate of the approximate change in SFTSL equity is closest to:

Which of the following statements regarding long-term supply contracts is FALSE?

Which of the following statements is FALSE?

Use the following information to answer the question(s)below. You are a risk manager for Security First Trust Savings and Loan (SFTSL).SFTSL's balance sheet is as follows (in millions of dollars): The duration of the auto loans is three years and the duration of the mortgages is eight years.Both cash reserves and checking and savings have zero duration.The CDs have a duration of two years and the long-term financing has a ten year duration. -The duration of SFTSL's equity is closest to:

Which of the following statements is FALSE?

Use the following information to answer the question(s)below. d'Anconia Copper expects to produce 500 million pounds of copper next year,with production costs of $0.75 per pound.Depending upon the economic conditions over the next year,d'Anconia Copper expects the price of copper next year to be either $1.40,$1.50,or $1.60 per pound,with each outcome being equally likely.d'Anconia Copper expects to sell all of its copper at the going price. -If the going price next year is $1.40 per pound,d'Anconia Copper's operating profit next year will be closest to: