Exam 20: Corporate Risk Management

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

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

Uses of future contracts include

Which of the following is NOT part of the five step corporate risk management process?

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

Assume that the current price of DEY stock is $27.50, that a 6 month call option on the stock has a strike or exercise price of $25.50, 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.

Annika has purchased put options on 1000 shares of Amazon stock with a striking price of $270 per share. The option premium was $6.00 per share. a. Compute Annika's profit or loss if the market value of Amazon's stock is $280 at expiration. b. Compute Annika's profit or loss if the market value of Amazon's stock is $260 at expiration. c. Compute Annika's profit or loss if the market value of Amazon's stock is $272 at expiration.

What is the value of d2 that should be used when calculating the value of a call option on this stock with the Black- Scholes option pricing model?

A maker of breakfast cereals has contracted to buy 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 popularity of options can be explained by the use of options

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

Directors and officers insurance protects the company if key personnel die or leave the firm for other opportunities.

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

The party that agrees to sell a commodity or currency in the forward market is said to have a

The major risks assumed by firms include

Jorge has purchased call options on 1000 shares of Goldman-Sachs (GS) stock with a strike price of $240 per share. The option premium was $4.00 per share. a. Compute Jorge's profit or loss if the market value of GS stock is $250 at expiration. b. Compute Jorge's profit or loss if the market value of GS stock is $230 at expiration. c. Compute Jorge's profit or loss if the market value of GS stock is $242 at expiration.

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?

A(n) ________ is a contract that requires the holder to buy or sell a stated commodity at a specified price at a specified time in the future.

An example of commodity risk would be

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