Question 1

Besides speculation, what is another reason risk managers may employ stack and roll hedging strategies?

Accepted Answer

A)  Near term contracts have more volume 
B)  Commodity prices are more attractive 
C)  Arbitrage usually exists 
D)  Mispricing occurs frequently at long term maturities 
A)  Near term contracts have more volume 
B)  Commodity prices are more attractive 
C)  Arbitrage usually exists 
D)  Mispricing occurs frequently at long term maturities A

Question 2

Corn call options with a $1.70 strike price are trading for a $0.15 premium. Farmer Jayne decides to hedge her 20,000 bushels of corn by selling short call options. Six-month interest rates are 4.0% and she plans to close her position and sell her corn in 6 months. What is her profit or loss if spot prices are $1.60 per bushel when she closes her position?

Accepted Answer

A)  $1,000 loss 
B)  $2,000 gain 
C)  $2,120 loss 
D)  $2,120 gain 
A)  $1,000 loss 
B)  $2,000 gain 
C)  $2,120 loss 
D)  $2,120 gain D

Question 3

Midwest Airlines is short 2 million gallons of jet fuel. Since no jet fuel contract exists, they decide to hedge with crude oil futures. One 42 barrel of crude oil is needed to produce 20 gallons of jet fuel. If one contract is for 1,000 barrels, how many crude oil contracts will they need to properly hedge their exposure?

Accepted Answer

A)  2,000 contracts 
B)  4,200 contracts 
C)  20 million contracts 
D)  42 million contracts 
A)  2,000 contracts 
B)  4,200 contracts 
C)  20 million contracts 
D)  42 million contracts B

Question 4

KidCo. Cereal Company sells ʺSugar Cornsʺ for $2.50 per box. The company will need to buy 20,000 bushels of corn in 6 months to produce 40,000 boxes of cereal. Non-corn costs total $60,000. What is the companyʹs profit if they purchase call options at $0.12 per bushel with a strike price of $1.60? Assume the 6-month interest rate is 4.0% and the spot price in 6 months is $1.65 per bushel.

Accepted Answer

A)  $6,504 profit 
B)  $8,005 loss 
C)  $12,064 profit 
D)  $11,293 loss 
A)  $6,504 profit 
B)  $8,005 loss 
C)  $12,064 profit 
D)  $11,293 loss

Question 5

A bank makes a long term loan and funds the loan by issuing certificates of deposit today, at three months, six months and nine months. To hedge the interest rate risk of issuing the CDs, the bank enters into futures contracts with maturities of 3, 6 and 9 months. Which type of hedge is described by this strategy?

Accepted Answer

A)  Pure hedge 
B)  Stack hedge 
C)  Straight hedge 
D)  Strip hedge 
A)  Pure hedge 
B)  Stack hedge 
C)  Straight hedge 
D)  Strip hedge

Question 6

Why are synthetics created and/or calculated when the actual derivative is available?

Accepted Answer

The pricing of a synthetic may

Question 7

To plant and harvest 20,000 bushels of corn, Farmer Jayne incurs fixed and variable costs totaling $33,000. The current spot price of corn is $1.80 per bushel. What is the profit or loss if the spot price is $1.90 per bushel when she harvests and sells her corn?

Accepted Answer

A)  $3,000 gain 
B)  $3,000 loss 
C)  $5,000 gain 
D)  $5,000 loss 
A)  $3,000 gain 
B)  $3,000 loss 
C)  $5,000 gain 
D)  $5,000 loss

Question 8

Why are managerial controls over option and forward trading departments vital to proper risk control?

Accepted Answer

Hedging requires matching deri

Question 9

Explain the relationship between options costs and profits under a put option insurance strategy.

Accepted Answer

The higher strike puts have higher premi

Question 10

A $1.75 strike call option has a $0.14 premium. The $1.75 strike put option premium is $0.12. What is the net cost for Farmer Jayne to create a synthetic short forward contract? (Assume 4.0% interest.)

Accepted Answer

A)  $0.0208 
B)  -$0.0208 
C)  $0.000 
D)  -$0.0424 
A)  $0.0208 
B)  -$0.0208 
C)  $0.000 
D)  -$0.0424

Question 11

Why would a manufacturer elect to use a long call strategy instead of a forward contract to hedge the risk associated with variable costs?

Accepted Answer

The long call strategy allows

Question 12

Which type of hedge has elements of speculation?

Accepted Answer

A)  Pure hedge 
B)  Stack hedge 
C)  Straight hedge 
D)  Strip hedge 
A)  Pure hedge 
B)  Stack hedge 
C)  Straight hedge 
D)  Strip hedge

Question 13

A farmer expects to harvest 800,000 bushels of corn. To eliminate price risk, the farmer elects to short corn futures. What would cause the farmer to short only 720,000 bushels of corn?

Accepted Answer

A)  Basis risk 
B)  Illiquid futures markets 
C)  Margin requirements 
D)  Quantity uncertain 
A)  Basis risk 
B)  Illiquid futures markets 
C)  Margin requirements 
D)  Quantity uncertain

Question 14

Farmer Jayne decides to hedge 10,000 bushels of corn by purchasing put options with a strike price of $1.80. Six-month interest rates are 4.0% and the total premium on all puts is $1,200. If her total costs are $1.65 per bushel, what is her marginal change in profits if the spot price of corn drops from $1.80 to $1.75 by the time she sells her crop in 6 months?

Accepted Answer

A)  $248 loss 
B)  $0 
C)  $252 gain 
D)  $1,500 loss 
A)  $248 loss 
B)  $0 
C)  $252 gain 
D)  $1,500 loss

Question 15

A farmer sells 4 million bushels of corn at a spot price of $2.10 per bushel. The total cost of production was $9.2 million. The farmer has an effective tax rate of 25%. If the farmer entered into a futures contract at a price of $2.40 per bushel on 4 million bushels, what is the farmerʹs net loss or gain?

Accepted Answer

A)  $100,000 loss 
B)  $800,000 loss 
C)  $300,000 gain 
D)  $400,000 gain 
A)  $100,000 loss 
B)  $800,000 loss 
C)  $300,000 gain 
D)  $400,000 gain

Question 16

An airline is deciding to hedge with crude oil futures, gasoline futures, heating oil futures or natural gas futures. Given their associated R-squared relationships between each commodity and jet fluke prices, which futures contract offers the best hedge?

Accepted Answer

A)  Crude oil, R2 = .25 
B)  Gasoline, R2 = .18 
C)  Heating oil, R2 = .46 
D)  Natural gas, R2 = .36 
A)  Crude oil, R2 = .25 
B)  Gasoline, R2 = .18 
C)  Heating oil, R2 = .46 
D)  Natural gas, R2 = .36

Question 17

Midwest Airlines is short 2 million gallons of jet fuel. Since no jet fuel contract exists, they decide to hedge with crude oil futures. The price of jet fuel is currently $2.70 per gallon and the price of crude oil is $99 per barrel. Assuming they hold the correct number of crude oil futures contracts, what crude oil price will be needed to perfectly hedge an increase in jet fuel prices to $2.84 per gallon?

Accepted Answer

A)  $ 2.84 
B)  $ 94.12 
C)  $ 99.00 
D)  $ 104.13 
A)  $ 2.84 
B)  $ 94.12 
C)  $ 99.00 
D)  $ 104.13

Question 18

Corn call options with a $1.75 strike price are trading for a $0.14 premium. Farmer Jayne decides to hedge her 20,000 bushels of corn by selling short call options. Six-month interest rates are 4.0% and she plans to close her position in 6 months. What is the total premium she will earn on her short position?

Accepted Answer

A)  $2,800 
B)  $2,912 
C)  $800 
D)  $1,600 
A)  $2,800 
B)  $2,912 
C)  $800 
D)  $1,600

Question 19

Farmer Jayne bought a $1.70 strike put option for $0.11 and sold a $1.75 strike call option for a premium of $0.14. Her total costs are $1.65 per bushel and interest rates are 4.0% over this period. What is the floor in her strategy assuming a 20,000-bushel crop?

Accepted Answer

A)  $624 
B)  $1,624 
C)  $2,624 
D)  $3,624 
A)  $624 
B)  $1,624 
C)  $2,624 
D)  $3,624

Question 20

KidCo. bought forward contracts on 20,000 bushels of corn at $1.65 per bushel. Corporate tax rates are 35.00%. Revenue is $100,000 and other costs are $60,000. Spot prices on corn are $1.75 per bushel. Calculate the after-tax net income.

Accepted Answer

A)  $7,000 loss 
B)  $7,000 gain 
C)  $4,550 loss 
D)  $4,550 gain 
A)  $7,000 loss 
B)  $7,000 gain 
C)  $4,550 loss 
D)  $4,550 gain

Besides speculation, what is another reason risk managers may employ stack and roll hedging strategies?

Why are synthetics created and/or calculated when the actual derivative is available?

To plant and harvest 20,000 bushels of corn, Farmer Jayne incurs fixed and variable costs totaling $33,000. The current spot price of corn is $1.80 per bushel. What is the profit or loss if the spot price is $1.90 per bushel when she harvests and sells her corn?

Why are managerial controls over option and forward trading departments vital to proper risk control?

Explain the relationship between options costs and profits under a put option insurance strategy.

A $1.75 strike call option has a $0.14 premium. The $1.75 strike put option premium is $0.12. What is the net cost for Farmer Jayne to create a synthetic short forward contract? (Assume 4.0% interest.)

Why would a manufacturer elect to use a long call strategy instead of a forward contract to hedge the risk associated with variable costs?

Which type of hedge has elements of speculation?

A farmer expects to harvest 800,000 bushels of corn. To eliminate price risk, the farmer elects to short corn futures. What would cause the farmer to short only 720,000 bushels of corn?

An airline is deciding to hedge with crude oil futures, gasoline futures, heating oil futures or natural gas futures. Given their associated R-squared relationships between each commodity and jet fluke prices, which futures contract offers the best hedge?

Farmer Jayne bought a $1.70 strike put option for $0.11 and sold a $1.75 strike call option for a premium of $0.14. Her total costs are $1.65 per bushel and interest rates are 4.0% over this period. What is the floor in her strategy assuming a 20,000-bushel crop?

KidCo. bought forward contracts on 20,000 bushels of corn at $1.65 per bushel. Corporate tax rates are 35.00%. Revenue is $100,000 and other costs are $60,000. Spot prices on corn are $1.75 per bushel. Calculate the after-tax net income.

Introduction to Derivatives

An Introduction to Forwards and Options

Insurance, Collars, and Other Strategies

Financial Forwards and Futures

The Wide World of Futures Contracts

Interest Rates Forwards and Futures

Swaps

Parity and Other Option Relationships

Binomial Option Pricing

The Black-Scholes Formula

Financial Engineering and Security Design

Corporate Applications

Real Options

Filters

Exam 4: Introduction to Risk Management

Besides speculation, what is another reason risk managers may employ stack and roll hedging strategies?

Why are synthetics created and/or calculated when the actual derivative is available?

To plant and harvest 20,000 bushels of corn, Farmer Jayne incurs fixed and variable costs totaling $33,000. The current spot price of corn is $1.80 per bushel. What is the profit or loss if the spot price is $1.90 per bushel when she harvests and sells her corn?

Why are managerial controls over option and forward trading departments vital to proper risk control?

Explain the relationship between options costs and profits under a put option insurance strategy.

A $1.75 strike call option has a $0.14 premium. The $1.75 strike put option premium is $0.12. What is the net cost for Farmer Jayne to create a synthetic short forward contract? (Assume 4.0% interest.)

Why would a manufacturer elect to use a long call strategy instead of a forward contract to hedge the risk associated with variable costs?

Which type of hedge has elements of speculation?

A farmer expects to harvest 800,000 bushels of corn. To eliminate price risk, the farmer elects to short corn futures. What would cause the farmer to short only 720,000 bushels of corn?

An airline is deciding to hedge with crude oil futures, gasoline futures, heating oil futures or natural gas futures. Given their associated R-squared relationships between each commodity and jet fluke prices, which futures contract offers the best hedge?

Farmer Jayne bought a $1.70 strike put option for $0.11 and sold a $1.75 strike call option for a premium of $0.14. Her total costs are $1.65 per bushel and interest rates are 4.0% over this period. What is the floor in her strategy assuming a 20,000-bushel crop?

KidCo. bought forward contracts on 20,000 bushels of corn at $1.65 per bushel. Corporate tax rates are 35.00%. Revenue is $100,000 and other costs are $60,000. Spot prices on corn are $1.75 per bushel. Calculate the after-tax net income.

Introduction to Derivatives

An Introduction to Forwards and Options

Insurance, Collars, and Other Strategies

Financial Forwards and Futures

The Wide World of Futures Contracts

Interest Rates Forwards and Futures

Swaps

Parity and Other Option Relationships

Binomial Option Pricing

The Black-Scholes Formula

Financial Engineering and Security Design

Corporate Applications

Real Options

Filters