09 Finance

Aspects of demand risk controllable by the firm include

• product quality

• interest rates

• entry of external competitor

• status of the regional and national economy

Eliminating all possible risk will ultimately

• guarantee the highest possible cash flow over the long run.

• cancel out all profits with cost of hedging.

• result in lower expected cash flow but the highest cash flow for the worst case scenario.

• guarantee that the firm will not experience losses.

The purpose of a hedging strategy is to

• avoid speculation on future prices.

• speculate that future prices will be lower than the spot price.

• speculate that future prices will be higher than the spot price.

• avoid exposure to commodity rate risk.

The party that agrees to sell a commodity or currency in the forward market is said to have a

• long position.

• short position.

• protected position.

• split position.

Swenson Oil & Gas allows its customers to prepurchase heating oil in June for the coming winter. Swenson's customers who take advantage of the offer

• are speculating that fuel prices will be higher in the future.

• have purchased a form of call option for heating fuel.

• are entering into a futures contract to offset the risk of higher fuel prices during the winter.

• are purchasing a form of insurance against fuel shortages.

Which of the following risks would be the best candidate for self insurance?

• Potential malpractice suits for a 5 doctor surgery group.

• Fire insurance for a business that operates 3 restaurants.

• Life insurance on the partners of a 3 lawyer law firm. If one of the partners dies, the other two will need to buy her share of the business.

• A large parcel delivery company sustains occasional damage to its vehicles.

Which of the following is NOT an advantage of futures contracts?

• They are inexpensive compared to customized forward contracts.

• They trade on exchanges rather than over the counter.

• Features such as contract size and expiration date are standardized.

• The size and commodity can always be perfectly tailored to form a perfect hedge.

A commodity such as diesel fuel for which there is no available futures contract might be satisfactorily hedged with

• stock index futures.

• interest rate futures.

• heating oil futures.

• electricity futures.

A(n) ....... gives the holder the right to buy a stated number of shares at a specified price for a limited time.

• stock index futures contract

• put option

• call option

• interest rate futures contract

An investor would buy a ....... if he or she believes that the price of the underlying stock or asset will fall in the near future.

• call option

• convertible bond

• put option

• futures contract to take delivery of an asset at a future date