Exam 21: Risk Management

A firm can borrow at a floating rate of LIBOR + 1% on short-term loans.If it swaps its short-term payments so that it receives LIBOR + 2% and pays a fixed rate of 3%,what is the rate of interest on its borrowing?

The risk that the firm will not have,or will not be able to raise,the cash required to meet the margin calls on its hedges is called:

What is an actuarially fair price?

A gold mining firm sells futures contracts worth 1000 ounces at a price of $800 per ounce for maturity one year from today.If gold futures prices decrease to $798 per ounce,what is the cash flow to the producer?

Use the table for the question(s)below. -Suppose oil futures prices are as given in the above table (price per barrel).Suppose you sell 100 crude oil futures contracts,each for 1000 barrels of crude oil,at the current futures price of $108 per barrel on day 0.What is your cumulative profit/loss in your margin account by the end of day 5?

A company has a current tax rate of 30% and faces a 15% chance that the its output prices will drop and it will lose $100,000 over the next year.The firm would then be in a 10% tax bracket if it faces a loss.Compute the net present value (NPV)from purchasing insurance if the rate of interest is 5% and the beta of the output prices is 0.

If the price of insurance equals the net present value (NPV)of the expected payment,it is said to be

When there is a mismatch between a firm's risk exposure and the underlying futures contract used for hedging,it referred to as basis risk.

A firm estimates that the loss from a weather-related closing is $10 million and the probability of occurrence is 0.1% over the next year.If claims are paid at the end of the year,the annual risk-free rate is 5%,the market risk premium is 6%,and the beta of these losses is 0.5,compute the insurance premium.

Use the table for the question(s)below. -Suppose oil futures prices are as given in the above table (price per barrel).Suppose you sell 100 crude oil futures contracts,each for 1000 barrels of crude oil,at the current futures price of $108 per barrel on day 0.What is your profit/loss in your margin account from the end of day 4 to the end of day 5?

A firm can borrow at fixed AA rates minus 1% for long-term loans.If it swaps its long-term payments so that it receives the fixed AA rate and pays a AA floating rate,what is the rate of interest on its borrowing if the floating rate is r%?

What is moral hazard?

Heinz uses 2000 tons of corn syrup each year as an ingredient in its tomato ketchup products.Heinz is concerned about the increase in prices of corn-based products and purchases a fixed-price contract to buy corn syrup at $10,000 per ton.What is the impact on earnings before taxes as opposed to no hedging if the price of corn is $10,000 per ton over the next year?

Insurance companies diversify their risks by pooling together highly correlated policies.

Marking to market for a futures contract will ensure that the sum of the daily changes to the margin account will equal the difference between the original contract price and the price at the end of the contract.

The risk of fire at a car assembly plant is 0.2%.If the firm will receive a payment of $30 million in one year if there is a fire during the year,what is the net present value (NPV)of purchasing insurance if the firm will face financial distress costs of $5 million and issuance costs of $1 million in the event of a loss if the risk-free rate is 5%?

Adverse selection is a market friction that raises the cost of insurance.

What is the percentage change in a 5-year zero-coupon bond with a duration of 5 years,when interest rates increase from 9% to 10%?

Suppose oil futures prices are as given in the above table (price per barrel).Suppose you buy 100 crude oil futures contracts,each for 1000 barrels of crude oil,at the current futures price of $108 per barrel on day 0.What is your cumulative profit/loss in your margin account by the end of day 5?

Vertical integration can increase firm value only if a merger provides gains from ________ and cost savings.