Question 1

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 A

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)  Melanie's creditors will not lend her money if her crops might lose money 
C)  Katherine's 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)  Melanie's creditors will not lend her money if her crops might lose money 
C)  Katherine's 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 D

Question 3

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

Accepted Answer

The pricing of a synthetic may reveal an arbitrage opportunity,or at least a cheaper method,by which to employ the desired strategy.

Question 4

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 5

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 6

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

Accepted Answer

The higher strike puts have higher premi

Question 7

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

Question 8

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

Question 9

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 fro

Question 10

Given a 25% chance of a 600,000 bushel yield and a 75% chance of a 500,000 bushel yield,what quantity should the farmer hedge in order to protect against an uncertain harvest? Assume the farmer is willing to take reasonable risk.

Accepted Answer

A)  0 
B)  500,000 
C)  525,000 
D)  600,000 
A)  0 
B)  500,000 
C)  525,000 
D)  600,000

Question 11

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 12

KidCo Cereal Company sells "Sugar Corns" 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 company's 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 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

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 16

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 17

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 18

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

Accepted Answer

Hedging requires matching deri

Question 19

Engage the class in a discussion of why firms hedge risks.Steer them towards an understanding that firms manufacture products,they do not speculate in commodity markets.Now,turn the tables and ask why manufacturers do not employ pure hedge strategies with forward contracts.Try to get the class to arrive at the conclusion that since firms are experts in their respective industries,their knowledge may benefit them by implementing creative strategies,while still hedging losses.

Accepted Answer

Firms hedge risks to protect themselves

Question 20

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 farmer's 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

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?

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

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

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

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.

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

Given a 25% chance of a 600,000 bushel yield and a 75% chance of a 500,000 bushel yield,what quantity should the farmer hedge in order to protect against an uncertain harvest? Assume the farmer is willing to take reasonable risk.

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?

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?

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

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.

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

Introduction to Derivatives

An Introduction to Forwards and Options

Insurance, collars, and Other Strategies

Financial Forwards and Futures

Commodity Forwards and Futures

Interest Rate Forwards and Futures

Swaps

Parity and Other Option Relationships

Binomial Option Pricing: Basic Concepts

Binomial Option Pricing: Selected Topics

The Black-Scholes Formula

Market-Making and Delta-Hedging

Exotic Options: I

Financial Engineering and Security Design

Corporate Applications

Real Options

The Lognormal Distribution

Monte Carlo Valuation

Brownian Motion and Itos Lemma

The Black-Scholes-Merton Equation

Risk-Neutral and Martingale Pricing

Exotic Options: 2

Volatility

Interest Rate and Bond Derivatives

Value at Risk

Credit Risk

Filters

Exam 4: Introduction to Risk Management

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?

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

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

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

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.

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

Given a 25% chance of a 600,000 bushel yield and a 75% chance of a 500,000 bushel yield,what quantity should the farmer hedge in order to protect against an uncertain harvest? Assume the farmer is willing to take reasonable risk.

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?

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?

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

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.

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

Introduction to Derivatives

An Introduction to Forwards and Options

Insurance, collars, and Other Strategies

Financial Forwards and Futures

Commodity Forwards and Futures

Interest Rate Forwards and Futures

Swaps

Parity and Other Option Relationships

Binomial Option Pricing: Basic Concepts

Binomial Option Pricing: Selected Topics

The Black-Scholes Formula

Market-Making and Delta-Hedging

Exotic Options: I

Financial Engineering and Security Design

Corporate Applications

Real Options

The Lognormal Distribution

Monte Carlo Valuation

Brownian Motion and Itos Lemma

The Black-Scholes-Merton Equation

Risk-Neutral and Martingale Pricing

Exotic Options: 2

Volatility

Interest Rate and Bond Derivatives

Value at Risk

Credit Risk

Filters