Question 1

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $3.30 per bushel.At expiration the spot price of wheat is $2.80 per bushel.The hedger has:

Accepted Answer

A)  saved 50' per bushel through hedging. 
B)  gained peace of mind at a price of 50' per bushel. 
C)  the opportunity to avoid taking delivery, since price declined. 
D)  locked in an effective price of $3.05 per bushel.

Question 2

A cotton producer has purchased cotton futures that involve 50,000 pounds of cotton at a price of $0.60 per pound.By contract expiration the producer finds that cotton prices have declined by $0.07 per pound.As a result of the futures contracts,the producer will:

Accepted Answer

A)  lose $3,500 per contract in the futures market which offsets gains in the cash market. 
B)  gain $3,500 per contract in the futures market which offsets losses in the cash market. 
C)  lose $3,500 per contract in the futures market and suffer an opportunity cost in the cash market. 
D)  gain $3,500 per contract in the futures market and gain $0.10 per pound in the cash market.

Question 3

Hedging is foolish unless you have reason to believe that the odds are stacked against your favor.

Accepted Answer

A) True 
 B)False

Question 4

A farmer hedged his risk by buying put options on wheat with an exercise price of $2.70 at a price of $0.14 per bushel.If the price of wheat at the expiration of the contract is $2.70,what is the net revenue from each bushel of wheat?

Accepted Answer

A)  $2.56 
B)  $2.63 
C)  $2.70 
D)  $2.84

Question 5

Which of the following statements is correct for an interest rate swap?

Accepted Answer

A)  There is an exchange on principal between counterparties. 
B)  There is no exchange of principal between counterparties. 
C)  There is an exchange of currencies between counterparties. 
D)  There is no exchange of cash between counterparties.

Question 6

How does a soybean farmer lock in a price of $5.40 per bushel when the cash price at harvest is only $4.90?

Accepted Answer

A)  Profit in futures market to offset loss in cash market by selling futures contract at $5.40/bushel. 
B)  Break even in both markets by buying a futures contract at $5.40/bushel. 
C)  Profit in cash market to offset loss in futures market by buying futures contract at $5.40/bushel. 
D)  Break even in both markets by selling a futures contract at $5.40/bushel.

Question 7

In an interest rate swap,borrowers typically exchange fixed-rate payments in one currency for:

Accepted Answer

A)  fixed-rate payments in another currency. 
B)  variable-rate payments in another currency. 
C)  fixed-rate payments in the same currency. 
D)  variable-rate payments in the same currency.

Question 8

A farmer who sells a futures contract is betting that prices will _____ at the expiration of the contract.

Accepted Answer

A)  decrease 
B)  increase 
C)  remain constant 
D)  guarantee high profits

Question 9

You enter into a forward contract to take delivery of 1 million euros 3 months from now.What happens to the price you will pay at expiration if marks depreciate during the contract?

Accepted Answer

A)  Your price will increase. 
B)  Your price will decrease. 
C)  Your price was fixed at the onset of the contract. 
D)  Your price was fixed, and you will receive correspondingly more marks due to the depreciation.

Question 10

Which of the following futures contract holders is speculating?

Accepted Answer

A)  A wheat farmer who sells wheat futures 
B)  A cattle rancher who buys live cattle futures 
C)  A candy maker who buys sugar futures 
D)  An oil producer who sells crude oil futures

Question 11

A survey of the world's 500 largest companies found that almost all the companies use derivatives in some way to manage their risk.

Accepted Answer

A) True 
 B)False

Question 12

What has happened to cause a $250 loss to be marked to the margin account of a futures contract buyer?

Accepted Answer

A)  The commodity decreased in value on that day. 
B)  The commodity increased in value on that day. 
C)  The commodity decreased in value by $250 over the contract's life. 
D)  The commodity increased in value by $250 over the contract's life.

Question 13

The process of marking a futures contract to market means that:

Accepted Answer

A)  the profitability of the contract is locked in from the onset of the contract. 
B)  the amount of commodity to be delivered changes as prices change. 
C)  contracts are closed out as soon as they become unprofitable. 
D)  profits or losses are posted to the contract daily.

Question 14

One distinguishing difference between the buyer of a futures contract and the buyer of an option contract is that the futures buyer:

Accepted Answer

A)  pays a much higher premium than option buyers. 
B)  has an obligation to purchase, not a choice. 
C)  can lose no more than the initial premium. 
D)  has increased rather than reduced risk.

Question 15

A large dental lab plans to purchase 1,000 ounces of gold in 1 month.Assume again that gold prices can be $280,$300,or $320 an ounce.
a.What will total expenses be if the firm purchases call options on 1,000 ounces of gold with an exercise price of $300 an ounce? The options cost $3 per ounce.
b.What will total expenses be if the firm purchases call options on 1,000 ounces of gold with an exercise price of $295 an ounce? These options cost $7 per ounce.

Accepted Answer

The answer of A large dental lab plans to purchase...

Question 16

Put options can be thought of as insurance policies for commodity producers.

Accepted Answer

A) True 
 B)False

Question 17

Costs of financial distress arise from disruption to normal business operations as well as from the effect that financial distress has on the firm's investment decisions.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is not correct concerning forward contracts? Forward contracts:

Accepted Answer

A)  are not standardized. 
B)  do not set the price until the end of the contract. 
C)  are not traded on organized exchanges. 
D)  are not marked to market daily.

Question 19

Hershey's Chocolate is concerned about cocoa prices prior to building inventory for Halloween sales.Analysts project that price per ton could vary from $1,250 to $1,500.A September call option can be purchased with a $1,300 strike price for a premium of $145.What is Hershey's worst-case scenario if it purchases these options?

Accepted Answer

A)  Cocoa prices will rise to $1,500 and Hershey is protected only to a price of $1,300. 
B)  Cocoa prices will decline to $1,250 and Hershey must pay an extra $50 per ton. 
C)  Cocoa prices will not rise above Hershey's break-even price of $1,445, which equals the sum of the strike price plus the option premium. 
D)  Cocoa prices will remain below $1,300 and Hershey will lose $145 per option contract.

Question 20

Risk policies are the same across companies.

Accepted Answer

A) True 
 B)False

Exam 24: Risk Management

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $3.30 per bushel.At expiration the spot price of wheat is $2.80 per bushel.The hedger has:

A cotton producer has purchased cotton futures that involve 50,000 pounds of cotton at a price of $0.60 per pound.By contract expiration the producer finds that cotton prices have declined by $0.07 per pound.As a result of the futures contracts,the producer will:

Hedging is foolish unless you have reason to believe that the odds are stacked against your favor.

A farmer hedged his risk by buying put options on wheat with an exercise price of $2.70 at a price of $0.14 per bushel.If the price of wheat at the expiration of the contract is $2.70,what is the net revenue from each bushel of wheat?

Which of the following statements is correct for an interest rate swap?

How does a soybean farmer lock in a price of $5.40 per bushel when the cash price at harvest is only $4.90?

In an interest rate swap,borrowers typically exchange fixed-rate payments in one currency for:

A farmer who sells a futures contract is betting that prices will _____ at the expiration of the contract.

You enter into a forward contract to take delivery of 1 million euros 3 months from now.What happens to the price you will pay at expiration if marks depreciate during the contract?

Which of the following futures contract holders is speculating?

A survey of the world's 500 largest companies found that almost all the companies use derivatives in some way to manage their risk.

What has happened to cause a $250 loss to be marked to the margin account of a futures contract buyer?

The process of marking a futures contract to market means that:

One distinguishing difference between the buyer of a futures contract and the buyer of an option contract is that the futures buyer:

Put options can be thought of as insurance policies for commodity producers.

Costs of financial distress arise from disruption to normal business operations as well as from the effect that financial distress has on the firm's investment decisions.

Which of the following is not correct concerning forward contracts? Forward contracts:

Risk policies are the same across companies.