Exam 30: Risk Management

Suppose the current exchange rate is $1.62/£,the interest rate in the united states is 5.25%,the interest rate in the United Kingdom is 4%,and the volatility of the $/£ exchange rate is 18%.Using the Black-Scholes formula,the price of a six-month European call option on the British pound with a strike price of $1.60/£ will be closest to:

Use the following information to answer the question(s)below. Rearden Metal imports ore from South America.Rearden Metal is worried that the South American mines may enter into a long-term contract with the Chinese to sell all of their ore output to China,hence cutting off Rearden Metal's supply.In the event of such a contract with the Chinese,Rearden Metal will face much higher costs for its raw materials causing its operating profits to decline substantially and its marginal tax rate to fall from its current level of 35% down to 10%.An insurance firm has agreed to write a trade insurance policy that will pay Rearden Metal $2,500,000 in the event of the South American supply of ore being cut off.The chance of the South American supply being cut off is estimated to be 20%,with a beta of -2.0.The risk-free rate of interest is 4% and the return on the market is estimated to be 12%. -The actuarially fair premium for this insurance policy is closest to:

Assuming that your firm will purchase insurance,what is the minimum-size deductible that would leave your firm with an incentive to implement the new safety policies?

Which of the following statements is FALSE?

The duration of a five-year bond with 8% annual coupons trading at par is closest to:

Which of the following statements is FALSE?

To cover the costs that result if some aspect of the business causes harm to a third party or someone else's property a firm would purchase:

Which of the following statements is FALSE?

The cash-and-carry strategy consists of all of the following simultaneous trades EXCEPT:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

In December 2005,the spot exchange rate for the British Pound was $1.7188/£ and the one-year forward rate was $1.8675/£.Suppose that at the same time Luther Industries entered into a contract to purchase goods with a price of £375,000 to be delivered in one year.Simultaneously Luther entered into a one-year forward contract to purchase £375,000.At the time the contract payment was due,the spot exchange rate was $1.9975/£.What is the amount of the payment in U.S.dollars that Luther Industries paid?