Question 1

From a strictly conceptual perspective, why would any manufacturer consider hedging their variable costs? Answer as if you own the company.

Accepted Answer

I manufacture a product. Profits come fr

Question 2

Which of the following situations does NOT describe someone who should implement a hedge strategy?

Accepted Answer

A)  Mary is very nervous about losing profits if selling prices drop 
B)  Melanieʹs creditors will not lend her money if her crops might lose money 
C)  Katherineʹs board of directors will not tolerate losses, even if it means profits are smaller 
D)  Dawn wants to reduce price fluctuations, but will need to conduct many transactions to achieve her goals 
A)  Mary is very nervous about losing profits if selling prices drop 
B)  Melanieʹs creditors will not lend her money if her crops might lose money 
C)  Katherineʹs board of directors will not tolerate losses, even if it means profits are smaller 
D)  Dawn wants to reduce price fluctuations, but will need to conduct many transactions to achieve her goals

Question 3

Two 6-month corn put options are available. The strike prices are $1.80 and $1.75 with premiums of $0.14 and $0.12, respectively. Total costs are $1.65 per bushel and 6-month interest rates are 4.0%. Farmer Jayne wishes to hedge 20,000 bushels for 6 months. What is the highest profit or minimum loss between the two options if the spot price in 6 months is $1.70 per bushel?

Accepted Answer

A)  $88 loss 
B)  $88 gain 
C)  $496 loss 
D)  $496 gain 
A)  $88 loss 
B)  $88 gain 
C)  $496 loss 
D)  $496 gain

Question 4

A 6-month forward contract for corn exists with a price of $1.70 per bushel. If Farmer Jayne decides to hedge her 20,000 bushels of corn with the forward contract, what is her profit or loss if spot prices are $1.65 or $1.80 when she sells her crop in 6 months? Her total costs are $33,000.

Accepted Answer

A)  $1,000 gain or $1,000 loss 
B)  $0 gain or $3,000 gain 
C)  $0 loss or $3,000 loss 
D)  $1,000 gain or $1,000 gain 
A)  $1,000 gain or $1,000 loss 
B)  $0 gain or $3,000 gain 
C)  $0 loss or $3,000 loss 
D)  $1,000 gain or $1,000 gain

Question 5

When selecting among various put options with different strike prices, in order to hedge a long asset position, which of the following statements is true?

Accepted Answer

A)  Higher strike puts cost more and provide higher floors 
B)  Higher strike puts cost less and provide higher floors 
C)  Lower strike puts cost more and provide higher floors 
D)  Lower strike puts cost less and provide higher floors 
A)  Higher strike puts cost more and provide higher floors 
B)  Higher strike puts cost less and provide higher floors 
C)  Lower strike puts cost more and provide higher floors 
D)  Lower strike puts cost less and provide higher floors

From a strictly conceptual perspective, why would any manufacturer consider hedging their variable costs? Answer as if you own the company.

Which of the following situations does NOT describe someone who should implement a hedge strategy?

A 6-month forward contract for corn exists with a price of $1.70 per bushel. If Farmer Jayne decides to hedge her 20,000 bushels of corn with the forward contract, what is her profit or loss if spot prices are $1.65 or $1.80 when she sells her crop in 6 months? Her total costs are $33,000.

When selecting among various put options with different strike prices, in order to hedge a long asset position, which of the following statements is true?

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

From a strictly conceptual perspective, why would any manufacturer consider hedging their variable costs? Answer as if you own the company.

Which of the following situations does NOT describe someone who should implement a hedge strategy?

A 6-month forward contract for corn exists with a price of $1.70 per bushel. If Farmer Jayne decides to hedge her 20,000 bushels of corn with the forward contract, what is her profit or loss if spot prices are $1.65 or $1.80 when she sells her crop in 6 months? Her total costs are $33,000.

When selecting among various put options with different strike prices, in order to hedge a long asset position, which of the following statements is true?

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