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Exam 23: Enterprise Risk Management

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Question 21

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You expect to deliver 42,000 bushels of wheat to the market in July.Today,you hedge your position by selling futures contracts on half of your expected delivery at the final price of the day.Assume that the market price turns out to be 582.0 when you actually deliver the wheat.How much more or less would you have earned if you had not bought the futures contracts? Wheat - 5,000 bu.: U.S.cents per bu.

A) $8,000 less
B) $4,305 less
C) neither more nor less
D) $4,305 more
E) $8,000 more

F) A) and B)
G) All of the above

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Question 22

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The seller of a forward contract:

A) is obligated to make delivery and accept the forward price.
B) has the option of making delivery and receiving the greater of the spot price or the contract price.
C) has the option of either making delivery or accepting delivery.
D) is obligated to take delivery and pays the lower of the spot market price or the contract price.
E) is obligated to take delivery and pay the forward price.

F) A) and B)
G) C) and D)

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Question 23

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Explain how a manufacturer who has an ongoing need for silver as a raw material in the production process might use futures to hedge.What does the manufacturer hope to gain?

The National Bank has an agreement with The Foreign Bank to exchange 500,000 U.S.dollars for 380,000 Euros on the first day of each of the next 3 calendar quarters.This agreement is best described as a(n) :

You own three January futures contracts on gold.What is the total value of your position as of the end of this day's trading? Gold - 100 troy oz.: U.S.dollars and cents per troy oz.

You own shares of a stock and believe the stock price will increase in the future.However,you realize the stock price could decline and want to hedge that risk.Which one of the following option positions should you take to create the desired hedge?

Explain why a swap is effectively a series of forward contracts.

You are the buyer for a cereal company and you must buy 80,000 bushels of corn next month.The futures contracts on corn are based on 5,000 bushels and are currently quoted at 415′0 cents per bushel for delivery next month.If you want to hedge your cost,you should _____ contracts at a cost of _____ per contract.

What was the highest price per troy ounce for the December silver futures contract today? Silver - 5,000 troy oz.: Dollars and cents per troy oz.

Which one of the following methods of setting prices would reduce the transactions exposure for both the buyer and seller of a swap contract?

A graph depicting the gains and losses a seller of a forward contract would earn at various market prices is referred to as a:

Futures contracts:

Sue recently purchased a right to buy 100 shares of ABC stock for $27.50 a share if she so chooses at any time within the next four months.Which one of the following does Sue own?

An option contract: I.can be used to hedge risk. II.can be used to speculate in the market. III.can be based on a futures contract to create a futures option. IV.cannot be based on a foreign currency.

Dog's can borrow money at either a fixed rate of 8.25 percent or a variable rate set at prime plus 0.5 percent.Cat's can borrow money at either a variable rate of prime plus 1 percent or a fixed rate of 8 percent.Dog's prefers a fixed rate and Cat's prefers a variable rate.Given this information,which one of the following statements is correct?

You decided to speculate in the market and sold 8 gold futures contracts when the futures price was $867.50 per ounce.The price on the contract maturity date was $730.40.What was your total profit or loss if the contract size was 100 ounces?

You are a jewelry maker.In May of each year,you purchase 10,000 troy ounces of silver to restock your production inventory.Today,you hedged your position at what turned out to be the lowest price of the day.Assume the actual price per troy ounce of silver is 9.215 in May.How much did you gain or lose by hedging your position? Silver - 5,000 troy oz.: U.S.dollars and cents per troy oz.

You purchased four April futures contracts on gold when the price quote was 692.5.Given today's closing prices as shown in the table,what is your current profit or loss? Gold - 100 troy oz.: U.S.dollars and cents per troy oz.

Which one of the following can a firm do if it effectively manages its financial risks?

Which of the following are futures exchanges? I.New York Mercantile Exchange II.New York Stock Exchange III.Chicago Board of Trade IV.NASDAQ