Q&A Hero

Q: A call option: A) gives its owner the right to sell a given number of shares or some other asset at a specified price over a given period. B) purchaser makes money if the price of the underlying stock or asset decreases. C) gives its owner the right to purchase a given number of shares of stock or some other asset at a specified price over a given period. D) does none of the above.

Q: Financial futures include: A) Treasury bond futures, which are the most popular of all futures contracts in terms of contracts issued. B) interest rate futures, which have been around the longest. C) stock index futures, which allow for either a cash settlement or a stock settlement. D) all of the above.

Q: 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) The computer company should sell gold futures contracts. B) The computer company should sell more gold futures contracts than it should buy. C) This is a standard business situation, which would be favorable if it were to happen, so no hedge is needed. D) The computer company should lower its finished product prices now in anticipation of the decrease in the price of gold inputs.

Q: Futures contracts: A) can be used by financial managers to reduce risk. B) provide their holder with an opportunity to buy or sell an asset at some future time if the asset's value has changed in a manner favorable to the futures contract holder. C) sustain a small change in value when there is a small change in the price of the underlying commodity. D) have all of the characteristics stated above.

Q: A call option on a stock is a financial instrument defined by which of the following statements? A) It obligates the investor holding it to sell the stock at the specified price at the stated date in the future. B) It obligates the investor holding it to buy the stock at the specified price at the stated date in the future. C) It gives the investor holding it the right, but not the obligation, to buy the stock at the specified price at the stated date in the future. D) It gives the investor holding it the right, but not the obligation, to sell the stock at the specified price at the stated date in the future.

Q: 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? A) The U.S. company should sell the foreign currency using futures contracts. B) The U.S. company should buy more foreign currency futures contracts than it should sell. C) The U.S. company should buy the foreign currency using futures contracts. D) This is a standard business situation that would be favorable if it were to happen, so no hedge is needed.

Q: Barco Corp. common stock is currently selling for $36.50. A call option on Barco stock costs $.75 per share on a normal contract of 100 shares. This option has an exercise price of $39 and expires in one month. What is the minimum value of this option? A) $2.50 B) $75 C) $0 D) $36.50

Q: Ahmad bought put options on Verizon with a striking price of $32. The option premium was $2.50. Just before the contract expired, Verizon stock 30.50 per share. Ahmad: A) made a profit of $1.50 per share. B) lost $2.50 per share because the option would not be exercised. C) lost $0.50 per share. D) lost $1.50 per share.

Q: Ahmad bought call options on Home Depot with a striking price of $34. The option premium was $3.50. Just before the contract expired, Home Depot stock was $36 per share. Ahmad: A) made a profit of $2.00 per share. B) lost $3.50 per share because the option would not be exercised. C) made a profit of $3.50 per share. D) lost $1.50 per share.

Q: Mayspring Corporation common stock is currently selling for $72.00 per share. A call option on Mayspring Corporation that expires in two months has an exercise price of $72.50. This call option is said to be: A) out-of-the-money. B) at-the-money. C) in-the-money. D) covered.

Q: A(n) ________ can be exercised only on the expiration date. A) European option B) at-the-money option C) short option D) American option

Q: The price at which the stock or asset may be purchased from (or sold to) the option writer is referred to as: A) intrinsic value of the option. B) option premium. C) open interest. D) exercise or striking price.

Q: 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. A) call option B) convertible bond C) put option D) futures contract to take delivery of an asset at a future date

Q: A(n) ________ gives the holder the right to sell a stated number of shares at a specified price for a limited time. A) stock index futures contract B) put option C) call option D) interest rate futures contract

Q: A(n) ________ gives the holder the right to buy a stated number of shares at a specified price for a limited time. A) stock index futures contract B) put option C) call option D) interest rate futures contract

Q: 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? A) $800 profit B) $356 loss C) $800 loss D) There is no profit or loss until the contract expires.

Q: 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) It rose by $800. B) It fell by $356. C) It fell by $800. D) There is no change in value until the contract expires.

Q: 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) None B) $356 C) $144 D) $32

Q: Uses of future contracts include: A) eliminating uncertainty about the future cost of key inputs. B) eliminating uncertainty about the prices that will be received when a commodity is ready for market. C) speculating on future price movements of commodities which the speculator neither uses nor produces. D) all of the above.

Q: A commodity such as diesel fuel for which there is no available futures contract might be satisfactorily hedged with: A) stock index futures. B) interest rate futures. C) heating oil futures. D) electricity futures.

Q: Which of the following is NOT an advantage of futures contracts? A) They are inexpensive compared to customized forward contracts. B) They trade on exchanges rather than over the counter. C) Features such as contract size and expiration date are standardized. D) The size and commodity can always be perfectly tailored to form a perfect hedge.

Q: 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?

Q: What motivates users of raw materials to hedge future prices by entering into futures contracts? What is the disadvantage of this practice?

Q: 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?

Q: The objective of a prudent financial manager is to eliminate all foreign exchange risk.

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

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

Q: A purchaser of commodities who is completely hedged with forward contracts has eliminated the risk that prices will rise before the purchase is concluded.

Q: Banque de Lyon agrees to sell Golden Socks 1,000,000 euros at a price of $1.35 to the euro 6 months from today. If the spot price of the euro in six months is $1.45, A) the payoff to Banque de Lyon is $100,000. B) the payoff to Banque de Lyon is ($100,000). C) the payoff to Banque de Lyon is ($135,000). D) the payoff to Golden Socks is ($100,000).

Q: 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 30 euros to the case. Payment will be due at the end of November. They expect to sell the wine to restaurants and retailers for $63 per case. Hudson Valley has hedged its foreign exchange risk by entering into a forward contract to purchase euros in November at $1.30/euro. If the spot exchange rate at the end of November is $1.50/euro, Hudson Valley's gross profit will be ________. A) $180,000 B) ($60,000) C) $60,000 D) $240,000

Q: 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 30 euros to the case. Payment will be due at the end of November. They expect to sell the wine to restaurants and retailers for $63 per case. Hudson Valley has hedged its foreign exchange risk by entering into a forward contract to purchase euros in November at $1.30/euro. If the spot exchange rate at the end of November is $1.50/euro, the payoff to Hudson Valley for hedging is ________. A) $180,000 B) ($60,000) C) $60,000 D) $240,000

Q: 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 30 euros to the 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 $1.50 /euro, what is the gross profit on the wine? A) $180,000 B) ($180,000) C) $330,000 D) $150,000

Q: 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 $3.00 per gallon. Swenson hedged its position by contracting to purchase 400,000 gallons of oil for November delivery at a price of $2.50 per gallon. If the November spot price is $2.25 per gallon, Swenson's gross profit on the heating oil sold in June will be A) $100,000. B) ($100,000). C) $200,000. D) $0.00.

Q: 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 $3.00 per gallon. Swenson hedged its position by contracting to purchase 400,000 gallons of oil for November delivery at a price of $2.50 per gallon. If the November spot price is $2.25 per gallon, the payoff to Swenson is: A) $100,000. B) ($100,000). C) $200,000. D) $0.00.

Q: 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 $3.00 per gallon. Swenson hedged its position by contracting to purchase 400,000 gallons of oil for November delivery at a price of $2.50 per gallon. If the November spot price is $2.75 per gallon, the payoff to Swenson is: A) $100,000. B) ($100,000). C) $200,000. D) $0.00.

Q: 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) it could make unexpected profits if fuel prices decline. B) it could suffer large losses if the wholesale cost of fuel rises above the price it sold the fuel for in June. C) it will make normal profits if winter prices do not change very much from the June spot price. D) all of the above.

Q: Swenson Oil & Gas allows its customers to prepurchase heating oil in June for the coming winter. Swenson's customers who take advantage of the offer: A) are speculating that fuel prices will be higher in the future. B) have purchased a form of call option for heating fuel. C) are entering into a futures contract to offset the risk of higher fuel prices during the winter. D) are purchasing a form of insurance against fuel shortages.

Q: The party that agrees to sell a commodity or currency in the forward market is said to have a: A) long position. B) short position C) protected position. D) split position.

Q: A large agribusiness firm has contracted to deliver 100,000 bushels of wheat for $8.50 a bushel at the end of October. On the delivery date, the spot price of wheat is $8.70 per bushel. Which of the following is true? A) The seller of the contract has $20,000 loss. B) The buyer of the contract has a $20,000 loss. C) The buyer of the contract has a $20,000 profit D) Both A and C are true

Q: A maker of breakfast cereals has contracted to buy 100,000 bushels of wheat for $8.50 a bushel at the end of October. On the delivery date, the spot price of wheat is $8.70 per bushel. Which of the following is true? A) The seller of the contract has $20,000 profit. B) The buyer of the contract has a $20,000 loss. C) The buyer of the contract has a $20,000 profit D) Both A and B are true

Q: The purpose of a hedging strategy is to: A) avoid speculation on future prices. B) speculate that future prices will be lower than the spot price. C) speculate that future prices will be higher than the spot price. D) avoid exposure to commodity rate risk.

Q: (Business of Life) What guidelines should determine whether or not an individual should buy life insurance?

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

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

Q: It is not legal for a corporation to hold life insurance policies on its employees.

Q: Workers' compensation insurance protects employees income in case they are laid off or fired.

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

Q: Which of the following types of insurance cannot be sold in the United States? A) Insurance that protects against loss of revenue due to bad weather. B) Insurance that protects a companies executives and directors from lawsuits. C) Life insurance which pays the corporation when an employee dies. D) All these types of insurance can be sold in the U. S.

Q: Which of the following individual situations would best justify the cost of a life insurance policy? A) Single income with young children. B) Single income, no dependents. C) Dual income, grown children. D) Married couple, each had substantial income before retirement.

Q: Which of the following should determine whether or not the firm should purchase insurance from an outside party? A) Only the frequency of incidents B) The cost of the policy and the expected losses C) Only the maximum size of incidents D) Only the firms normal cash reserves

Q: Which of the following types of insurance does NOT involve a contract with an external party? A) Property insurance B) Life insurance C) Directors and officers insurance D) Self insurance

Q: Self-insurance would not provide adequate protection in which of the following circumstances? A) Unemployment insurance for a firm that rarely lays off employees. B) Damage to the company's own vehicles. C) Major ecological disasters resulting from oil spills. D) Revenue lost because of bad weather during the peak shopping season.

Q: Which of the following is a consequence of transferring risk to an insurance company? A) An increase in stock value because risk has been reduced. B) A guaranteed small loss in exchange for protection against large losses. C) Higher rates of return because the firm is now free to pursue high-risk projects. D) Protection against losses at no significant cost to the firm.

Q: Self insurance is the practice of: A) holding reserves within the firm to cover potential losses. B) CEO's holding large life insurance policies on themselves, payable to the company. C) companies in unrelated businesses forming subsidiaries to cover their insurance needs. D) purchasing insurance policies directly rather than through a broker.

Q: Which of the following types of risk cannot typically be transferred to an insurance company? A) Losses due to property damage from storms. B) Losses due to on-the job injuries suffered by employees. C) Losses due to rising raw materials costs that cannot be passed on to customers. D) Losses due to the untimely death of an employee in a key position.

Q: 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?

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

Q: 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.

Q: A manufacturer of breakfast cereals should always be fully hedged against both rising and falling grain prices.

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

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

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

Q: Some risks cannot be transferred to other parties.

Q: 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? A) Expected cash flow, $116 million, standard deviation $5 million B) Expected cash flow, $107 million, standard deviation $5.5 million C) Expected cash flow, $112 million, standard deviation $8 million D) Expected cash flow, $134 million, standard deviation $38 million

Q: 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? A) Expected cash flow, $116 million, standard deviation $5 million B) Expected cash flow, $107 million, standard deviation $5.5 million C) Expected cash flow, $112 million, standard deviation $8 million D) Expected cash flow, $134 million, standard deviation $38 million

Q: The optimal corporate risk management strategy is to: A) avoid or transfer every possible risk. B) do nothing to transfer risk. C) transfer about half the risk. D) there is no strategy that is optimal for all firms.

Q: Firms that wish to minimize risk will attempt to: A) minimize the standard deviation of expected cash flows. B) maximize the standard deviation of expected cash flows. C) maximize expected cash flows. D) balance expected cash flows with the standard deviation of expected cash flows.

Q: Which of the following are part of the five step corporate risk management process? A) Identify and understand the firm's major risks B) Decide how much risk to assume C) Monitor and manage the risks the firm assumes D) All of the above

Q: Eliminating all possible risk will ultimately: A) guarantee the highest possible cash flow over the long run. B) cancel out all profits with cost of hedging. C) result in lower expected cash flow but the highest cash flow for the worst case scenario. D) guarantee that the firm will not experience losses.

Q: Assume that government and insurance providers pressure physicians to prescribe generic drugs whenever possible. For the producers of branded drugs, this change represents: A) insurable risk. B) operational risk. C) demand risk. D) hedgeable risk.

Q: An example of commodity risk would be: A) volatile exchange rates with countries from which commodities are imported. B) the price of copper for electrical contractors. C) volatile exchange rates with countries to which commodities are exported. D) raw materials that do not meet quality specifications.

Q: Aspects of demand risk controllable by the firm include: A) product quality. B) interest rates. C) entry of external competitors. D) status of the regional and national economy.

Q: The major risks assumed by firms include: A) demand risk. B) foreign-exchange risk. C) operational risk. D) all of the above.

Q: Use the following information to answer the following question(s).Below is an excerpt from Table 19.1, Foreign Exchange Ratrd (January 8, 2010) that appears in your text. (Sources The Wall Street Journal and Reuters)U.S. $ equivalentCurrency per U.S. $CountryMon.Mon.India (Rupee)0.0219945.4752Britain (Pound)1.60280.623930-day Forward1.60240.624190-day Forward1.60190.6243180-day Forward1.60080.6247Canada (Dollar)0.971.030930-day Forward0.971.030990-day Forward0.971.0309180-day Forward0.96981.30311Switzerland franc0.97721.023330-day Forward0.97731.023290-day Forward0.97771.0228180-day Forward0.97831.0222The 90-day forward rate for Canadian dollars is:A) 10.309.B) 9.7000.C) 0.9700.D) 01.0309.

Q: Use the following information to answer the following question(s).Below is an excerpt from Table 19.1, Foreign Exchange Ratrd (January 8, 2010) that appears in your text. (Sources The Wall Street Journal and Reuters)U.S. $ equivalentCurrency per U.S. $CountryMon.Mon.India (Rupee)0.0219945.4752Britain (Pound)1.60280.623930-day Forward1.60240.624190-day Forward1.60190.6243180-day Forward1.60080.6247Canada (Dollar)0.971.030930-day Forward0.971.030990-day Forward0.971.0309180-day Forward0.96981.30311Switzerland franc0.97721.023330-day Forward0.97731.023290-day Forward0.97771.0228180-day Forward0.97831.0222The British pound to Swiss franc exchange rate is:A) 1.64 British pounds to the Swiss franc.B) 1.5663 British pounds to the Swiss franc.C) .6097 British pounds to the Swiss franc.D) .9772 British pounds to the Swiss franc.

Q: Use the following information to answer the following question(s).Below is an excerpt from Table 19.1, Foreign Exchange Ratrd (January 8, 2010) that appears in your text. (Sources The Wall Street Journal and Reuters)U.S. $ equivalentCurrency per U.S. $CountryMon.Mon.India (Rupee)0.0219945.4752Britain (Pound)1.60280.623930-day Forward1.60240.624190-day Forward1.60190.6243180-day Forward1.60080.6247Canada (Dollar)0.971.030930-day Forward0.971.030990-day Forward0.971.0309180-day Forward0.96981.30311Switzerland franc0.97721.023330-day Forward0.97731.023290-day Forward0.97771.0228180-day Forward0.97831.0222The Swiss franc to British pound exchange rate is:A) 1.64 Swiss francs to the pound.B) 1.5663 Swiss francs to the pound.C) .6097 Swiss francs to the pound.D) .9772 Swiss francs to the pound.

Q: Use the following information to answer the following question(s).Below is an excerpt from Table 19.1, Foreign Exchange Ratrd (January 8, 2010) that appears in your text. (Sources The Wall Street Journal and Reuters)U.S. $ equivalentCurrency per U.S. $CountryMon.Mon.India (Rupee)0.0219945.4752Britain (Pound)1.60280.623930-day Forward1.60240.624190-day Forward1.60190.6243180-day Forward1.60080.6247Canada (Dollar)0.971.030930-day Forward0.971.030990-day Forward0.971.0309180-day Forward0.96981.30311Switzerland franc0.97721.023330-day Forward0.97731.023290-day Forward0.97771.0228180-day Forward0.97831.0222Assume that your firm must pay $4,000 to a Swiss firm. In Swiss francs Swiss firm will receive:A) 3,908.80 Swiss francs.B) 3,913 Swiss francs.C) 39,088 Swiss francs.D) 4,093.20 Swiss francs.

Q: Use the following information to answer the following question(s).Below is an excerpt from Table 19.1, Foreign Exchange Ratrd (January 8, 2010) that appears in your text. (Sources The Wall Street Journal and Reuters)U.S. $ equivalentCurrency per U.S. $CountryMon.Mon.India (Rupee)0.0219945.4752Britain (Pound)1.60280.623930-day Forward1.60240.624190-day Forward1.60190.6243180-day Forward1.60080.6247Canada (Dollar)0.971.030930-day Forward0.971.030990-day Forward0.971.0309180-day Forward0.96981.30311Switzerland franc0.97721.023330-day Forward0.97731.023290-day Forward0.97771.0228180-day Forward0.97831.0222Assume that your firm must pay 10,000,000 rupees to an Indian firm. How much will you have to pay in U.S. dollars.A) $2,199,000B) $219,900C) $454,752,000D) $$454,752

Q: Use the following information to answer the following question(s).Below is an excerpt from Table 19.1, Foreign Exchange Ratrd (January 8, 2010) that appears in your text. (Sources The Wall Street Journal and Reuters)U.S. $ equivalentCurrency per U.S. $CountryMon.Mon.India (Rupee)0.0219945.4752Britain (Pound)1.60280.623930-day Forward1.60240.624190-day Forward1.60190.6243180-day Forward1.60080.6247Canada (Dollar)0.971.030930-day Forward0.971.030990-day Forward0.971.0309180-day Forward0.96981.30311Switzerland franc0.97721.023330-day Forward0.97731.023290-day Forward0.97771.0228180-day Forward0.97831.0222The number of pounds you can purchase per U.S. dollar is:A) 1.6008.B) 6.239.C) 0.6239.D) 1.6028.

Q: Use the following information to answer the following question(s).Below is an excerpt from Table 19.1, Foreign Exchange Ratrd (January 8, 2010) that appears in your text. (Sources The Wall Street Journal and Reuters)U.S. $ equivalentCurrency per U.S. $CountryMon.Mon.India (Rupee)0.0219945.4752Britain (Pound)1.60280.623930-day Forward1.60240.624190-day Forward1.60190.6243180-day Forward1.60080.6247Canada (Dollar)0.971.030930-day Forward0.971.030990-day Forward0.971.0309180-day Forward0.96981.30311Switzerland franc0.97721.023330-day Forward0.97731.023290-day Forward0.97771.0228180-day Forward0.97831.0222To buy one Indian Rupee you would need:A) 2.199 cents.B) 45.4752 dollars.C) 21.99 cents.D) 4.54752 dollars.