Question 1

Briefly explain how a firm can hedge its risks using options.

Accepted Answer

A firm can use put options, for example,

Question 2

One can describe a forward contract as agreeing today to buy a product

Accepted Answer

A) at a later date at a price to be set in the future. 
B) today at its current price. 
C) at a later date at a price set today. 
D) if and only if its price rises above its exercise price. 
A) at a later date at a price to be set in the future. 
B) today at its current price. 
C) at a later date at a price set today. 
D) if and only if its price rises above its exercise price.

Question 3

Futures contracts are usually marked to market.

Accepted Answer

A) True 
 B)False

Question 4

The relationship between the spot and futures prices of financial futures is given by

Accepted Answer

A) [Futures price] = Spot price × (1 + rf)^t (where rf = risk-free rate). 
B) [Futures price] = Spot price × (1 + rf − y)^t (where y = dividend yield or interest rate). 
C) [Futures price] = Spot price × (1 + rm)^t (where rm = market rate of return). 
D) [Futures price] = Spot price × (1 + rm − rf)^t. 
A) [Futures price] = Spot price × (1 + rf)^t (where rf = risk-free rate). 
B) [Futures price] = Spot price × (1 + rf − y)^t (where y = dividend yield or interest rate). 
C) [Futures price] = Spot price × (1 + rm)^t (where rm = market rate of return). 
D) [Futures price] = Spot price × (1 + rm − rf)^t.

Question 5

What investment would be a hedge for a corn farmer?

Accepted Answer

A) Long corn put option 
B) Long corn call option 
C) Long corn futures 
D) None of these answers are correct. 
A) Long corn put option 
B) Long corn call option 
C) Long corn futures 
D) None of these answers are correct.

Question 6

The spot price for home heating oil is $0.55 per gallon. The futures price for one year from now is $0.57. If the risk-free rate is 6 percent per year, what is the net convenience yield?

Accepted Answer

A) 0.0411 
B) 0.0364 
C) 0.0236 
D) 0.0440 
A) 0.0411 
B) 0.0364 
C) 0.0236 
D) 0.0440

Question 7

Suppose that the current level of the Standard & Poor's Index is 500. The prospective dividend yield on S&P 500 stocks is 2 percent, and the risk-free interest rate is 6 percent. What is the value of a one-year futures contract on the index? (Assume all dividend payments occur at the end of the year.)

Accepted Answer

A) 530 
B) 520 
C) 540 
D) 560 
A) 530 
B) 520 
C) 540 
D) 560

Briefly explain how a firm can hedge its risks using options.

One can describe a forward contract as agreeing today to buy a product

Futures contracts are usually marked to market.

The relationship between the spot and futures prices of financial futures is given by

What investment would be a hedge for a corn farmer?

The spot price for home heating oil is $0.55 per gallon. The futures price for one year from now is $0.57. If the risk-free rate is 6 percent per year, what is the net convenience yield?

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters

Exam 26: Managing Risk

Briefly explain how a firm can hedge its risks using options.

One can describe a forward contract as agreeing today to buy a product

Futures contracts are usually marked to market.

The relationship between the spot and futures prices of financial futures is given by

What investment would be a hedge for a corn farmer?

The spot price for home heating oil is $0.55 per gallon. The futures price for one year from now is $0.57. If the risk-free rate is 6 percent per year, what is the net convenience yield?

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters