Exam 20: Corporate Risk Management

Mayspring Corporation common stock is currently selling for $72.00 per share.A call option on Mayspring Corporation that expires in two months has an exercise price of $72.50.This call option is said to be

A futures contract provides the holder with the option to buy or sell a stated contract involving a commodity or financial claim at a specified price over a stated time period.

When a party enters into a swap contract it agrees to

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

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

If you expect a stock's price to drop,it would be better to sell a call on that stock than to sell a put on it.

Use the following information to answer the following question(s). Valuing a call option using the Black-Scholes model: Current price of ABZ stock = $50 Exercise or strike price of the call option = $48 The maturity of the option is 0.5 years The annualized variance in the returns on the stock is .20 The risk free rate of interest is 3% per annum -What is the value of d₁ that should be used when calculating the value of a call option on this stock with the Black-Scholes option pricing model.

Which of the following is a vehicle for controlling exchange rate risk?

Which of the following types of insurance cannot be sold in the United States?

Currency swaps allow the financial manager to hedge exchange rate risk over shorter periods than options and futures contracts.

If a call option's exercise price is above the stock price,then the option's intrinsic value is zero.

Which of the following is NOT an advantage of futures contracts?

Swenson Oil & Gas allows its customers to prepurchase heating oil in June for the coming winter.Customers who took advantage of the offer prepurchased 400,000 gallons of oil at $3.50 per gallon.Swenson hedged its position by contracting to purchase 400,000 gallons of oil for November delivery at a price of $3.00 per gallon.If the November spot price is $3.85 per gallon,Swenson's gross profit on the heating oil sold in June will be

Assume that government and insurance providers pressure physicians to prescribe generic drugs whenever possible.For the producers of branded drugs,this change represents

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

Which of the following types of risk cannot typically be transferred to an insurance company?

Hudson Valley Distributors wants to be sure it has 10,000 cases of Beaujolais Nouveau to sell next November.In January,they enters into an agreement to buy the wine at a price of 34.62 euros per case.Payment will be due at the end of November.They expect to sell the wine to restaurants and retailers for $63 per case.If Hudson Valley does not hedge its position and the exchange rate in November is $1.30 /euro,what is the gross profit on the wine? (Round to the nearest dollar. )

The optimal corporate risk management strategy is to

Barco Corp.common stock is currently selling for $36.50.A call option on Barco stock costs $.75 per share on a normal contract of 100 shares.This option has an exercise price of $39 and expires in one month.What is the minimum value of this option?

The objective of a prudent financial manager is to eliminate all foreign exchange risk.