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If your firm produces a product that is used primarily by gold producers, then your firm might be subject to a risk related to the price of gold. If that risk is indirectly related to the price of gold, then this is an example of
a.transaction exposure.
b.translation exposure.
c.economic exposure.
d.none of the above.
55.For most firms the principle reason for hedging is
a.to reduced the likelihood of financial distress.
b.to comply with SEC regulations concerning firm risk tolerances.
c.to satisfy the owners of the firm’s shares.
d.to satisfy the owners of the firm’s debt.
56.You are the manager of a company that has an equal chance of earning either $20,000 or $40,000 before taxes. Your firm is subject to a 20% tax rate on the first $30,000 and 35% on all income earned beyond that point. If you are offered a costless hedge to achieve guaranteed before tax earnings of $30,000, what is the expected benefit to hedging?
a.$24,000
b.$23,250
c.$750
d.none of the above
57.If the managers of a firm have a greater aversion to risk, then
a.they are less likely to hedge.
b.they are more likely to hedge.
c.they are more likely to use derivatives to speculate.
d.none of the above.
58.You need to purchase apples 1-month from now and would like to hedge against price movements in apples. The spot price for apples is $5 a bushel and the risk-free rate is 10%. What is the 1-month forward price for a bushel of apples?
a.$4.96
b.$5.00
c.$5.04
d.$5.50
59.You need to purchase coal 4-months from now and would like to hedge against price movement. The spot price for coal is $50 a railroad car and the risk-free rate is 8%. What is the 4-month forward price for a railroad car of coal?
a.$48.73
b.$50.00
c.$51.30
d.$54.00
60.You find that the 6-month forward price for scrap steel is $15 a ton. If the 6-month risk-free rate is 10%, then what should be the spot price for scrap steel per ton?
a.$14.30
b.$15.00
c.15.73
d.$16.50
61.You notice that the spot price of beef loin is $30 per pound and the 9-month forward rate is $32.66 per pound. What is the annualized 9-month risk free rate of interest?
a.6.58%
b.8.87%
c.10.00%
d.12.00%
62.You notice that the spot price of beef loin is $30 per pound and the 9-month forward rate is $33.00 per pound. The annualized 9-month risk free rate of interest is 12%. What amount of arbitrage profits are available to you?
a.$.60
b.$.34
c.-$.34
d.-$.60
63.The spot rate exchange rate for Andromedan Pixels (ANP) is 3.00ANP/$. If the risk-free rate of return in Andromeda is 20% per annum while that in the U.S. is 3%, then what should be the 1-year forward rate for ANP/$?
a.$2.57
b.$3.00
c.$3.50
d.$3.60
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