Exam 20: Corporate Risk Management

The most you can ever lose when you purchase a put or call option is the premium.

Foreign-exchange risk can be important even for firms that have only U.S. operations.

Which of the following is essentially a type of insurance policy, but is regulated as a financial derivative?

What are some of the means by which firms can transfer risk to other parties? Should firms always transfer risks when it is possible to do so?

An American option can be exercised only on the expiration date.

The purpose of a hedging strategy is to

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 euro 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.)

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

A firm agrees to accept payments on a $1,000,000 loan with a fixed interest rate of 8% in exchange for making the payments on a loan with floating rate payments based on LIBOR. Payments are interest only with principal due in 10 years. The firm will benefit

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

An investor would buy a ________ if he or she believes that the price of the underlying stock or asset will fall in the near future.

Workers' compensation insurance provides coverage for on-the-job injuries suffered by employees.

A major factor impacting the demand for residential real estate is the availability of credit.

The strike price is the

Financial futures include

Self-insurance is the practice of

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.

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

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?

As the length of time left until expiration increases, the value of call and put options on the stock also increases.