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.Initial margin on the contract was 4% of the contract price with a maintenance margin of $500.By the end of the day,the price had fallen to $.57 per lb.How much will you be required to add to your margin account to replenish your maintenance margin?

A large agribusiness firm has contracted to deliver 100,000 bushels of wheat for $4.50 a bushel at the end of October.On the delivery date,the spot price of wheat is $4.70 per bushel.Which of the following is true?

The margin on a futures contract refers to the amount of equity the investor initially paid to purchase the futures contract.

The purpose of a hedging strategy is to

Unlike the owner of a(n)________ contract,the owner of a(n)________ contract does not have to exercise it.

What is the general rule that firms should follow when deciding how much risk to assume?

The term futures margin refers to

A seller of commodities who has entered into forward contracts with customers will profit if prices fall before the purchase is concluded.

A swap is generally structured so that no money initially changes hands.

The striking price is the

Which of the following scenarios carries the greatest risk of NOT being able to meet required payments (capital expenditure,dividend,interest and principal requirements)totaling $96 million?

What are the major variables in the Black-Scholes option pricing model and in what direction do they influence the price of call options?

Jorge has purchased call options on 1000 shares of Amazon stock with a striking price of $270 per share.The option premium was $4.00 per share. a.Compute Jorge's profit or loss if the market value of Amazon's stock is $280 at expiration. b.Compute Jorge's profit or loss if the market value of Amazon's stock is $260 at expiration. c.Compute Jorge's profit or loss if the market value of Amazon's stock is $272 at expiration.

How can a currency futures contract be used as a hedge against a potentially dramatic appreciation of a foreign currency that a U.S.company is expecting to convert into U.S.dollars?

Futures and currency swaps eliminate unfavorable price movements,whereas options can be used to eliminate the effect of both favorable and unfavorable price movements.

A(n)________ can be exercised only on the expiration date.

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

Well managed firms will always seek to transfer as much risk as possible.

Assume that N(d₁)= .63105 and N(d₂) = .50735.Compute the value of the call option using the Black-Scholes option pricing model.

A call option on a stock is a financial instrument defined by which of the following statements?