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Exam 23: Enterprise Risk Management

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Question 1

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Suppose a financial manager buys call options on 45,000 barrels of oil with an exercise price of $31 per barrel.She simultaneously sells a put option on 45,000 barrels of oil with the same exercise price of $31 per barrel.Her net profit per barrel is _____ if the price per barrel is $29 and _____ if the price per barrel is $35.

A) -$4; $2
B) -$2; $0
C) $0; -$2
D) $0; $2
E) -$2; $4

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

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Question 2

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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. $\begin{array} { | l | l | l | l | l | l | } \hline & \text { Open } & \text { High } & \text { Low } & \text { Settle } & \text { Chg } \\\hline \text { Dec } & 10.185 & 10.225 & 9.530 & 10.220 & - 0.605 \\\hline \text { Mar } & 10.190 & 10.270 & 9.600 & 10.254 & - 0.564 \\\hline\end{array}$

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

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

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Question 3

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For years,your family has operated a business that produces lawn mowers.Over the years,the industry has progressed and new mass production techniques have been developed.However,your firm cannot afford this new technology,nor can you compete against those firms that can.Thus,the family has decided to close its facility at the end of the year.Which one of the following describes the risks to which your family's firm succumbed?

Which one of the following obligates you only on the expiration date to sell an asset at the strike price if the option is exercised?

The buyer of an option contract:

Suppose your firm produces breakfast cereal and needs 65,000 bushels of corn in December for an upcoming promotion.You would like to lock in your costs today because you are concerned that corn prices might go up between now and December.To hedge your risk exposure,you could purchase corn futures contracts today effectively locking in a total settlement price of _____,based on the closing price shown in the table below. Futures: Corn - 5,000 bu.,U.S.cents per bu. $\begin{array} { | r | r | r | r | r | r | r | r | } \hline & \text { OPEN } & \text { HIGH } & \text { LOW } & \text { SETTLE } & \text { CHG } & \begin{array} { r } \text { LIFETIME } \\\text { HIGH }\end{array} & \begin{array} { r } \text { LIFETIME } \\\text { LOW }\end{array} \\\hline \text { July } & 256.75 & 256.75 & 252.00 & 252.50 & - 6.75 & 279.00 & 217.25 \\\hline \text { Dec } & 282.25 & 282.25 & 275.75 & 276.00 & - 8.00 & 288.00 & 237.00 \\\hline\end{array}$

Farmer Mac owns a large orange grove in Florida.The value of his business is directly related to the price of oranges.Which one of the following is a graphical representation of this price-value relationship?

Which two of the following are key differences between an option contract and a forward contract? I.option contracts can be resold but forward contracts cannot II.the option price is determined at settlement while the forward price is determined when the contract is initiated III.the rights and obligations of the buyer IV.cost when contract initiated

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

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. $\begin{array} { | l | l | l | l | l | l | l | l | } \hline & \text { OPEN } & \text { HIGH } & \text { LOW } & \text { SETTLE } & \text { CHG } & \begin{array} { l } \text { LIFETMME } \\\text { HIGH }\end{array} & \begin{array} { l } \text { LIFETMME } \\\text { LOW }\end{array} \\\hline \text { July } & 1163.0 & 1163.0 & 1135.5 & 1140.5 & - 7.0 & 1520.0 & 475.0 \\\hline \text { Sept } & 1154.5 & 1174.5 & 1137.0 & 1152.5 & - 7.0 & 1518.0 & 689.3 \\\hline\end{array}$

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?

An agreement that grants its owner the right,but not the obligation,to buy or sell a specific asset at a specific price for a set period of time is called a(n) _____ contract.

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?

You own three January futures contracts on gold.What is the total value of your position as of the end of this day's trading? Gold - 100 troy oz.: u.S.dollars and cents per troy oz. $\begin{array} { | r | r | r | r | r | } \hline & \text { Open } & \text { High } & \text { Low } & \text { Settle } \\\hline \text { Nov } & 734.2 & 735.6 & 730.4 & 732.8 \\\hline \text { Jan } & 667.4 & 668.2 & 658.1 & 660.5 \\\hline\end{array}$

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. $\begin{array} { | r | r | r | r | r | r | } \hline & \text { Open } & \text { High } & \text { Low } & \text { Settle } & \text { Chg } \\\hline \text { Dec } & 10.185 & 10.225 & 9.530 & 10.220 & - 0.605 \\\hline \text { Mar } & 10.190 & 10.250 & 9.600 & 10.244 & - 0.564 \\\hline\end{array}$

A call option contract:

Steve recently sold an option that requires him to purchase 100 shares of Omega stock at $40 a share should the option owner decide to exercise the option.What type of option contract did Steve sell?

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?

Which one of the following statements concerning option payoffs is correct?

Which one of the following is true regarding forward contracts?