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Financial Management Questions (Corporate Finance)

Customer Question

Under what circumstance will the buyer of a put option be asked to perform his or her obligation?

a. When the stock price has declined below the strike price

b. When the stock price has increased above the strike price

c. The put buyer has an equal obligation regardless of the relationship between stock and strike prices.

d. The put buyer has no obligation whatsoever.

In general, when deciding whether a market participant needs to buy or sell futures contracts in order to hedge, the rule could be:

a.buy futures if you have the underlying asset and sell futures if you need the underlying asset.

b. sell futures if you have the underlying asset and buy futures if you need the underlying asset.

c. buy futures if you want to speculate, sell futures if you want to hedge.

d. buy futures if you are willing to have unlimited risk, sell futures if you want capped risk.

A producer that is worried about the future price that will be available when the product is to be sold can hedge this price risk by:

a. buying a futures contract.

b. selling a futures contract.

c. buying a put option.

d. selling a call option.

Which of the following futures contract holders is speculating?

a. A wheat farmer who sells wheat futures

b. A cattle rancher who buys live cattle futures

c. A candy maker who buys sugar futures

d. An oil producer who sells crude oil futures

Which of the following would not be regulated in a standardized futures contract?

a. Quantity of asset to be traded

b. Quality of asset to be traded

c. The spot price

d. Date of settlement

If you sold a call option, you

a. are required to deliver stock if asked

b. are required to ask for stock to be delivered to you

c. have the right to ask for stock to be delivered to you

d. have the right to deliver stock to someone else

e. paid cash

If you own a call option, you

a. are required to deliver stock if asked

b. are required to ask for stock to be delivered to you

c. have the right to ask for stock to be delivered to you

d. have the right to deliver stock to someone else

e. received cash

Which of the following is not a parameter used in the Black-Scholes option-pricing model?

a. Current stock price

b. exercise price for the option

c. current time to expiration

d. time to expiration when the option was created originally

e. current interest rate

f. variability of the stock's price movements in the past.

Apply the Black-Scholes Option pricing model to the following information: Stock price = $33, Strike price = $33, t is 6 months (T=0.50., Std deviation is 0.30 and variance 0.09; d(1. = 0.34177, d(2. 0.12964, N(d(1..= 0.63369, N(d(2.. = 0.55155. What is the value of the call option?


a. not enough information

b. too much information

c. I'm switching to marketing

d. $3.60

e. $5.00

f. $600

g. $6.00

h. -$5.00

i. $16.325567

j. none of the above

Which of the following is an example of a hedge (or hedging or hedging a bet)?


a. an Auto lender requiring the borrower to buy car insurance.

b. A wheat farmer selling his crop before he harvests it.

c. An airline buying fuel for future delivery

d. An individual investor, who owns IBM stock, sells an IBM call.

e. A purchaser of a home who 'locks in' a mortgage rate 60 days before the loan closes.

f. All of the above.

Which of the following is not considered a derivative instrument?


a. Futures contract.

b. Exchange traded option.

c. An over the counter option (option between two private parties..

d. A share or shares of a company's Stock (or equity in the company..

e. none of the above.

Differences in currencies are attributed to which of the following:


a. inflation in the two countries (and differences in inflation rates.

b. political stability

c. monetary stability

d. geography issues (natural resources.

e. all of the above

Wheat is grown in many places in the US. There are many varieties of grain grown. The Chicago Board of Trade has created a 'standardized wheat contract' representing a certain grain type which farmers and users of grain can compare their variety to the contract variety. This is done to attract


a. as many producers as possible into the hedging arena

b. as many users of grains as possible

c. speculators as the markets become more viable and liquid

d. all of the above

Exxon uses a natural hedge. Which of the following describes Exxon's strategy in using a natural hedge?


a. buying put contracts on current production

b. selling forward production from wells being drilled

c. changing gasoline prices at service stations as crude oil prices change

d. absorbing price changes as crude oil prices change

e. I don't have a car so this is not important to me.

Which of the following is not a difference between forward and future contracts?


a. one has a standard size, the other can be tailored for a specific transaction.

b. One has a standard date, the other can be tailored for a specific transaction.

c. one represents a "today" price while the other is a price in the future.

d. one is exchange traded and the other is considered over the counter.

e. none of these

A natural hedge is


a. a hedge using natural things (crude oil as opposed to gasoline.

b. good in theory but not practical in the real world

c. one that may use consumers as the risk reducing entity

d. offset by futures, forwards or options contracts

Ironically, one of the "architects" behind the Black-Scholes model joined a hedge fund with former Wall Street Executives. The fund made over a billion dollars in profits over a 4 or 5 year period before almost destroying the US Capital Markets. The name of this firm is


a. Long Term Capital Management (LTCM).

b. don't select this answer!

c. nope, not this one

d. Myron's fund!

e. (Why do I have to learn this if the genius behind LTCM lost all this money and failed!.

Calculate the profit per share for an investor that exercises a put option with a strike price of $60 when the stock is selling for $46 and the premium for the put option was $4.


a. (-$14)

b. (-$10)

c. $10

d. $18

The interplay between interest rate differentials and exchange rates such that each adjusts until the foreign exchange market and the money market reach equilibrium is called the


a. Purchasing Power Parity Theory.

b. Balance of Payments.

c. Interest Rate Parity Theory.

d. None of the above.

What are ADR's?


a. African Deposit Receipts.

b. Affiliated medical doctors.

c. American Drug Relief certificates funding humanitarian aid.

d. Alternative deposit routing for sending money offshore.

e. A security that US citizens can own which represent ownership in a foreign entity.

Mortgages are purchased and pooled into one large fund. The fund then sells securities for the fund backed by these mortgages. If I purchase a specific security that pays me only the interest portion generated by the original mortgages in the fund, that is called


a. foolish

b. an "IO"

c. a "PO"

d. a CMO

e. I am still switching to marketing

Your corporation borrows money for 10 years with an interest rate that floats according to some index. Your corporation enters into another transaction whereby they agree to receive a floating rate return and agree to pay a fixed rate, essential converting their floating rate loan to a fixed rate loan. What is the company anticipating?


a. All rates will fall.

b. Fixed rates will fall.

c. Floating interest rates will rise significantly.

d. An arbitrage will exist to profit from this transaction.

e. Better season tickets to football game from the broker!

How much must the stock be worth at expiration in order for a call holder to break even if the exercise price is $50 and the call premium was $4?


a. $46

b. $50

c. $52

d. $54

If prices double in New York while the prices in Frankfort remain the same, the purchasing power of the dollar relative to the mark


a. should increase by 50%.

b. should increase by 100%.

c. should decrease by 50%.

d. should decrease by 100%.

It is generally not possible for a normal consumer to borrow money in the US at a low rate, convert that money to Yen, invest in risk-free Yen denominated interest bearing securities, and convert this amount using forward contracts at rates greater than a normal CD rate in the US. This is an example of


a. Purchasing price parity

b. Interest rate parity

c. Cross over rate parity

d. spot rates equaling forward rates

e. all of the above

Assume Purchasing Price parity holds. If a television set costs $500 in the US and that same set costs 725 Euro's. What is the spot exchange rate between Dollars to Euros?


a. 1 TV set to 1 TV set.

b. 1 Euro = $68

c. 1 Euro = $6.80

d. 1 Euro = $0.68

e. $1 = 1.45 Euros

f. $1 = 14.5 Euros

LIBOR is


a. when you dig ditches for a living.

b. a political party currently in power in the UK.

c. a bond issued in Europe.

d. similar to the Feds Funds rates in the U.S.

e. The last Interest rate quoted Before Orders Relinquish (last trade of the day..

Which of the following put strike prices would be considered in the money for a put where the underlying stock is trading at $55 per share? (all of the following are the strike prices.


a. $60

b. $55

c. $50

d. $45

e. All but 'a' above. ($60)

What form of hedging would you suggest for a producer that wishes to be protected from future price decreases but wants to benefit from any future price increases?


a. Buy a call option on the asset.

b. Sell a call option on the asset.

c. Buy a put option on the asset.

d. Sell a put option on the asset.

How might a firm such as General Mills use options to control raw material prices for breakfast cereals?


a. Buy call options on commodities.

b. Sell call options on commodities.

c. Buy put options on commodities.

d. Sell the "put-call" parity.

The primary purpose of financial futures is to:


a. benefit from increases in interest rates.

b. protect against swings in interest rates or prices of financial assets.

c. translate one currency into another.

d. guarantee the repayment of loan principal.

A decrease in which of the following terms will cause an increase in the call value of an option?


a. Interest rates

b. Time to maturity

c. Exercise price

d. Volatility of the stock

If the owner of a call option with a strike price of $35 finds the stock to be trading for $42 at expiration, then the option:


a. expires worthless.

b. will not be exercised.

c. is worth $7 per share.

d. cost too much initially.

Which of the following pair is incorrect?


a. Egypt / pound

b. Argentina / peso.

c. Baht / Thailand

d. Venezuela / peso

e. Rouble / Russia

Which of the following option traders receive, rather than pay, a premium?


a. Option sellers

b. Option buyers

c. Both option sellers and buyers

d. Neither buyers nor sellers receive premiums

Which combination of positions will tend to protect the owner from downside risk?


a. Buy the stock and buy a call option.

b. Sell the stock and buy a call option.

c. Buy the stock and buy a put option.

d. Buy the stock and sell a put option.

Which of the following is true for the owner of a call option?


a. The loss potential is unlimited.

b. The profit potential is unlimited.

c. The premium exceeds the strike price.

d. There is no expiration date, unless the option is a European call.

 

 

Note: Need answers by tommorrow short notice (24 hours)!

Submitted: 5 years ago.
Category: Homework
Expert:  David replied 5 years ago.

Under what circumstance will the buyer of a put option be asked to perform his or her obligation?

d. The put buyer has no obligation whatsoever.


In general, when deciding whether a market participant needs to buy or sell futures contracts in order to hedge, the rule could be:

b. sell futures if you have the underlying asset and buy futures if you need the underlying asset.


A producer that is worried about the future price that will be available when the product is to be sold can hedge this price risk

by:

b. selling a futures contract.


Which of the following futures contract holders is speculating?

b. A cattle rancher who buys live cattle futures


Which of the following would not be regulated in a standardized futures contract?

c. The spot price

 

If you sold a call option, you

a. are required to deliver stock if asked


If you own a call option, you

c. have the right to ask for stock to be delivered to you

 

Which of the following is not a parameter used in the Black-Scholes option-pricing model?


d. time to expiration when the option was created originally

 

Apply the Black-Scholes Option pricing model to the following information: Stock price = $33, Strike price = $33, t is 6 months

(T=0.50., Std deviation is 0.30 and variance 0.09; d(1. = 0.34177, d(2. 0.12964, N(d(1..= 0.63369, N(d(2.. = 0.55155. What is the

value of the call option?

d. $3.60


Which of the following is an example of a hedge (or hedging or hedging a bet)?


d. An individual investor, who owns IBM stock, sells an IBM call.


Which of the following is not considered a derivative instrument?

 

d. A share or shares of a company's Stock (or equity in the company..

 

Differences in currencies are attributed to which of the following:


e. all of the above

Wheat is grown in many places in the US. There are many varieties of grain grown. The Chicago Board of Trade has created a

'standardized wheat contract' representing a certain grain type which farmers and users of grain can compare their variety to the

contract variety. This is done to attract

d. all of the above

Exxon uses a natural hedge. Which of the following describes Exxon's strategy in using a natural hedge?


b. selling forward production from wells being drilled

 

Which of the following is not a difference between forward and future contracts?

e. none of these


A natural hedge is

c. one that may use consumers as the risk reducing entity

 

Ironically, one of the "architects" behind the Black-Scholes model joined a hedge fund with former Wall Street Executives. The fund

made over a billion dollars in profits over a 4 or 5 year period before almost destroying the US Capital Markets. The name of this

firm is

a. Long Term Capital Management (LTCM).

 

Calculate the profit per share for an investor that exercises a put option with a strike price of $60 when the stock is selling for

$46 and the premium for the put option was $4.

c. $10


The interplay between interest rate differentials and exchange rates such that each adjusts until the foreign exchange market and

the money market reach equilibrium is called the

d. None of the above.


What are ADR's?

e. A security that US citizens can own which represent ownership in a foreign entity.


Mortgages are purchased and pooled into one large fund. The fund then sells securities for the fund backed by these mortgages. If I

purchase a specific security that pays me only the interest portion generated by the original mortgages in the fund, that is called

b. an "IO"


Your corporation borrows money for 10 years with an interest rate that floats according to some index. Your corporation enters into

another transaction whereby they agree to receive a floating rate return and agree to pay a fixed rate, essential converting their

floating rate loan to a fixed rate loan. What is the company anticipating?


c. Floating interest rates will rise significantly.


How much must the stock be worth at expiration in order for a call holder to break even if the exercise price is $50 and the call

premium was $4?

d. $54

If prices double in New York while the prices in Frankfort remain the same, the purchasing power of the dollar relative to the mark

c. should decrease by 50%.

 

It is generally not possible for a normal consumer to borrow money in the US at a low rate, convert that money to Yen, invest in

risk-free Yen denominated interest bearing securities, and convert this amount using forward contracts at rates greater than a

normal CD rate in the US. This is an example of

b. Interest rate parity


Assume Purchasing Price parity holds. If a television set costs $500 in the US and that same set costs 725 Euro's. What is the spot

exchange rate between Dollars to Euros?

d. 1 Euro = $0.68

 

LIBOR is

d. similar to the Feds Funds rates in the U.S.


Which of the following put strike prices would be considered in the money for a put where the underlying stock is trading at $55 per

share? (all of the following are the strike prices.


a. $60

 

What form of hedging would you suggest for a producer that wishes to be protected from future price decreases but wants to benefit

from any future price increases?

a. Buy a call option on the asset.


How might a firm such as General Mills use options to control raw material prices for breakfast cereals?

a. Buy call options on commodities.


The primary purpose of financial futures is to:

b. protect against swings in interest rates or prices of financial assets.

 

A decrease in which of the following terms will cause an increase in the call value of an option?

c. Exercise price

 

If the owner of a call option with a strike price of $35 finds the stock to be trading for $42 at expiration, then the option:

c. is worth $7 per share.

 

Which of the following pair is incorrect?

d. Venezuela / peso


Which of the following option traders receive, rather than pay, a premium?


a. Option sellers

 

Which combination of positions will tend to protect the owner from downside risk?


c. Buy the stock and buy a put option.

 

Which of the following is true for the owner of a call option?

b. The profit potential is unlimited.



Edited by David on 9/24/2009 at 5:52 PM EST
Customer: replied 5 years ago.

Hello There,

Thanks for quick response. I'm only receiving 78% with the answers do you see some that you might have done incorrectly before I accept. I have one more opportunity to answer.

Expert:  David replied 5 years ago.
THIS ANSWER IS LOCKED!
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Category: Homework
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Customer: replied 5 years ago.
92% Thanks you so very much!

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