Exam 20: Corporate Risk Management

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?

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.

Bowman-Daniela-Mainland is a major producer and exporter of agricultural commodities.It has sold soy beans for future delivery to a Japanese firm and expects to receive payments of 400 million yen in 6 months and another 400 million yen in 1 year.To lock in the exchange rates on these two payments,BDM arranges forward contracts with an investment banker to sell 400 million yen at $0.0110 in 6 months and $0.0115 in 1 year.What will BDM's cash flow be in dollars from each of these transactions? How has it fixed its revenue in dollars from the soy bean sales?

You sold 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.What was your profit or loss for the day?

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

How is an airline that sells tickets that will be used several months in the future exposed to the risk of rising jet fuel prices? How can it manage that risk?

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

Swenson Oil & Gas allows its customers to prepurchase heating oil in June for the coming winter.If Swenson does not hedge its positions in the futures market

The seller of credit default swaps

Uses of future contracts include

A futures contract is a specialized form of a forward contract distinguished by an organized exchange which encourages confidence in the futures market by allowing for the effective regulation of trading.

Firms that wish to minimize risk will attempt to

A credit default swap functions like an insurance policy against the possibility of default on a bond or other security collateralized by debt.

How can a gold futures contract be used as a hedge against a potentially dramatic decrease in the price of the gold needed as an input into the production of computer microprocessors?

A purchaser of commodities who is completely hedged with forward contracts will profit if prices fall before the purchase is concluded.

A call option gives its owner the right to sell a given number of shares or some other asset at a specified price over a given period.

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 $3.25 per gallon,the payoff to Swenson is

An options contract gives its owner the right to buy or sell a fixed number of shares at a specified price over a limited time period.

Open interest provides the investor with some indication of the amount of liquidity associated with a particular option.

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 $2.75 per gallon,the payoff to Swenson is