125350 Financial Risk Management

1. Heating degree-day and cooling degree-day futures contracts make payments based on whether the temperature is abnormally hot or cold. If the company sells more drinks when it is abnormally hot, what should a soft drink manufacturer do to reduce its business risk?

 

a. The company will hedge its business risk using a cooling-degree-day futures contract because it will make payments when the usual business is slow.
b. The company will hedge its business risk using a heating-degree-day futures contract because it will make payments when the usual business is high.
c. Both heating degree-day and cooling degree-day futures cannot be used to reduce the company’s business risk.
d. none of the choice

2. Put option has a bid price of $2.50 and an ask price of $2.60. Assume there is a $10 brokerage commission. What amount will you receive after selling 1,000 options?
a. $2,490
b. $2,510
c. $2,590
d. none of the above

3. Which statement is FALSE?
I. Forward contracts usually have a range of delivery dates; futures contract often have one specified delivery date.
II. Forward contracts nearly always last longer than futures contracts
III. Delivery or final cash settlement usually takes place with forward contracts; the same is not true of futures contracts.
a. I only II, and III
b. I and II only
c. II and III only
d. I, II and III

4. A company enters into a long futures contract to long 10,000 units of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price per unit below which there will be a margin call?
a. 70 cents
b. 65 cents
c. 60 cents
d. 55 cents