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What are the primary motives for a hedger and a speculator in the derivatives market? If a wheat farmer sells wheat futures,is that hedging or speculating? Explain.

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The key is whether or not the contractin...

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Farmer Ted planted 200 acres in wheat this year.The weather has been perfect and he expects to harvest a record crop within the next two weeks.At present,he has no storage facilities and therefore must sell his crop as soon as it is harvested.Which one of the following risks is he facing because he must sell his crop at whatever the market price is at harvest time?


A) futures risk
B) volatility exposure
C) surplus risk
D) transactions exposure
E) translation exposure

F) A) and E)
G) B) and C)

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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?


A) futures contract
B) call option
C) put option
D) straddle
E) strangle

F) B) and E)
G) A) and B)

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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 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. A) loss $3,350 B) loss $2,200 C) no gain or loss D) gain $2,200 E) gain $3,350


A) loss $3,350
B) loss $2,200
C) no gain or loss
D) gain $2,200
E) gain $3,350

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

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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 E)

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

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In a forward contract,the parties agree ...

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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?

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The manufacturer needs to acquire silver...

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


A) risk profile.
B) payoff profile.
C) risk offer line.
D) scatter plot.
E) risk-return graph.

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

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Suppose you sell nine September silver futures contracts at the last price of the day as shown in the table below.What will be your profit or loss on this contract if the price turns out to be $12.09 per ounce at expiration? Futures: Silver - 5,000 troy oz,U.S.cents per troy oz. Suppose you sell nine September silver futures contracts at the last price of the day as shown in the table below.What will be your profit or loss on this contract if the price turns out to be $12.09 per ounce at expiration? Futures: Silver - 5,000 troy oz,U.S.cents per troy oz. A) loss of $25,425 B) loss of $7,050 C) loss of $3,025 D) profit of $3,025 E) profit of $25,425


A) loss of $25,425
B) loss of $7,050
C) loss of $3,025
D) profit of $3,025
E) profit of $25,425

F) A) and B)
G) C) and E)

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Given the following information,what is the price per troy ounce that will be used for today's marking-to-market for the December silver contract? Silver - 5,000 troy oz.: dollars and cents per troy oz. Given the following information,what is the price per troy ounce that will be used for today's marking-to-market for the December silver contract? Silver - 5,000 troy oz.: dollars and cents per troy oz. A) $9.53 B) $9.60 C) $10.185 D) $10.190 E) $10.220


A) $9.53
B) $9.60
C) $10.185
D) $10.190
E) $10.220

F) B) and E)
G) None of the above

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Which one of the following is true regarding forward contracts?


A) The upfront costs to enter a forward contract can be significant.
B) If a buyer of a forward contract earns a $200 profit then the seller will also profit by $200.
C) The buyer wins when market prices are less than the forward price.
D) The payoff profile for the buyer of a forward contract is an upward sloping linear function.
E) If the seller of a forward contract earns a profit then the buyer has neither a profit nor a loss.

F) B) and D)
G) A) and E)

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How much will you pay to purchase five August 125 orange juice futures put option contracts? Orange juice - 15,000 lbs: U.S.cents per lb. How much will you pay to purchase five August 125 orange juice futures put option contracts? Orange juice - 15,000 lbs: U.S.cents per lb. A) $1,200.00 B) $2,362.50 C) $4,162.50 D) $6,637.50 E) $6,750.00


A) $1,200.00
B) $2,362.50
C) $4,162.50
D) $6,637.50
E) $6,750.00

F) A) and D)
G) A) and E)

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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?


A) -$109,680
B) -$13,710
C) $13,710
D) $54,840
E) $109,680

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

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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. 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. A) $18,600 B) $21,000 C) $21,800 D) $23,680 E) $26,080


A) $18,600
B) $21,000
C) $21,800
D) $23,680
E) $26,080

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

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Browning Enterprises currently has all fixed-rate debt.The firm would like to convert part of this to floating-rate debt.Which one of the following will accomplish this for the firm?


A) option on floating-rate bonds
B) forward contract on U.S.Treasury bills
C) interest rate swap
D) currency swap
E) interest rate call option

F) B) and C)
G) B) and E)

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


A) eliminate all the risks faced by the firm
B) totally eliminate all financial risks
C) reduce the price volatility it faces
D) guarantee the firm's financial success
E) avoid all long-term financial risks

F) All of the above
G) C) and D)

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What is the closing value on this day for one March futures contract on silver? Silver - 6,000 troy oz.: U.S.dollars and cents per troy oz. What is the closing value on this day for one March futures contract on silver? Silver - 6,000 troy oz.: U.S.dollars and cents per troy oz. A) $47,650 B) $57,600 C) $61,140 D) $61,524 E) $61,620


A) $47,650
B) $57,600
C) $61,140
D) $61,524
E) $61,620

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

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Suppose you purchase the November call option on orange juice futures with a strike price of 150 at the price shown in the table below.What will be your profit or loss on this contract if the price of orange juice futures is $0.616 per pound at expiration of the option contract? Futures Options Orange juice: 15,000 lbs,U.S.cents per lb. Suppose you purchase the November call option on orange juice futures with a strike price of 150 at the price shown in the table below.What will be your profit or loss on this contract if the price of orange juice futures is $0.616 per pound at expiration of the option contract? Futures Options Orange juice: 15,000 lbs,U.S.cents per lb. A) loss of $2,107.50 B) loss of $1,717.50 C) no profit or loss D) profit of $1,717.50 E) profit of $2,107.50


A) loss of $2,107.50
B) loss of $1,717.50
C) no profit or loss
D) profit of $1,717.50
E) profit of $2,107.50

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

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If a firm creates an interest rate collar on a variable rate loan,then the rate the firm pays will always:


A) remain constant at the average of the floor and cap rates.
B) remain constant at the floor rate.
C) remain constant at the cap rate.
D) be higher than,or equal to,the cap but lower than,or equal to,the floor.
E) be higher than,or equal to,the floor but lower than,or equal to,the cap.

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

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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.


A) II and III only
B) I and II only
C) I,II,and III only
D) II,III,and IV only
E) I,II,III,and IV

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

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