Exam 20: Corporate Risk Management

In 2010,a deep water oil drilling rig owned by British Petroleum exploded in the Gulf of Mexico resulting in the deaths of several crew members,one of the worst ecological disasters in history,and major financial damage to the company.How could the five step corporate risk management process have avoided or mitigated this disaster.

It is not legal for a corporation to hold life insurance policies on its employees.

Firms that wish to minimize risk will attempt to:

You purchased one July futures contract of pork bellies at $.59 per lb.One contract represents 40,000 lbs.of pork bellies.By the end of the day,the price had fallen to $.57 per lb.How much did the value of your contract change during the day?

As the volatility of a stock's price increases,the value of call options ________ and the value of put options ________.

What are the differences between forward contracts and futures contracts? What are some advantages and disadvantages of each.

Options contracts all expire on the last trading day of the month.

A commodity such as diesel fuel for which there is no available futures contract might be satisfactorily hedged with:

Assume that the current price of DEY stock is $25,that a 1 year call option on the stock has a strike or exercise price of $27.50,the risk free rate is 4%,and that you have calculated N(d₁)as .5476 and N(d2)as .4432.Use the Black-Scholes model to calculate the price of the option.

What motivates users of raw materials to hedge future prices by entering into futures contracts? What is the disadvantage of this practice?

A(n)________ is a financial instrument that can be used to eliminate the effect of both favorable and unfavorable price movements.

The greater a firm's dividend payout,the ________ likely it is that the stock's price will rise above the exercise price.

Self-insurance would not provide adequate protection in which of the following circumstances?

A(n)________ gives the holder the right to buy a stated number of shares at a specified price for a limited time.

The major risks assumed by firms include:

How should corporations decide when to self insure against certain risks and when to purchase insurance from outside parties?

The term open interest refers to the:

The seller of an option keeps the option premium regardless of whether or not the option is ever exercised.

A maker of breakfast cereals has contracted to buy 100,000 bushels of wheat for $8.50 a bushel at the end of October.On the delivery date,the spot price of wheat is $8.70 per bushel.Which of the following is true?

Which of the following is a consequence of transferring risk to an insurance company?