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Exam 23: Enterprise Risk Management

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Question 41

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You are a jewelry maker.In May of each year,you purchase 10,000 troy ounces of silver to restock your production inventory.Today,you hedged your position at what turned out to be the lowest price of the day.Assume the actual price per troy ounce of silver is 9.215 in May.How much did you gain or lose by hedging your position? Silver - 5,000 troy oz.: u.S.dollars and cents per troy oz. $\begin{array} { | l | l | l | l | l | } \hline & \text { Open } & \text { High } & \text { Low } & \text { Settle } \\\hline \text { Mar } & 10.190 & 10.250 & 9.600 & 10.244 \\\hline \text { May } & 9.655 & 9.740 & 9.550 & 9.700 \\\hline\end{array}$

A) loss $3,350
B) loss $2,200
C) no gain or loss
D) gain $2,200
E) gain $3,350

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

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Question 42

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You own shares of a stock and believe the stock price will increase in the future.However,you realize the stock price could decline and want to hedge that risk.Which one of the following option positions should you take to create the desired hedge?

A) buy a call
B) sell a call
C) buy a put
D) sell a put

E) A) and D)
F) A) and C)

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Question 43

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What was the highest price per troy ounce for the December silver futures contract today? Silver - 5,000 troy oz.: Dollars and cents per troy oz. $\begin{array} { | r | r | r | r | r | r | } \hline & \text { Open } & \text { High } & \text { Low } & \text { Settle } & \text { Chg } \\\hline \text { Dec } & 10.185 & 10.225 & 9.530 & 10.220 & - 0.605 \\\hline \text { Mar } & 10.190 & 10.250 & 9.600 & 10.244 & - 0.564 \\\hline\end{array}$

Murray's can borrow money at a fixed rate of 10.5 percent or a variable rate set at prime plus 2.25 percent.Fred's can borrow money at a variable rate of prime plus 1.5 percent or a fixed rate of 12 percent.Murray's prefers a variable rate and Fred's prefers a fixed rate.Given this information,which one of the following statements is correct?

Which one of the following statements is correct in relation to a firm's short-run financial risk?

Company A can borrow money at a fixed rate of 7.5 percent or a variable rate set at prime plus 0.5 percent.Company B can borrow money at a variable rate of prime plus 1 percent or a fixed rate of 7 percent.Company A prefers a fixed rate and company B prefers a variable rate.Given this information,which one of the following statements is correct?

You are the purchasing agent for a major cookie company.You anticipate that your firm will need 20,000 bushels of oats in December.You decide to hedge your position today and did so at the closing price of the day.Assume that the actual market price turns out to be 228.0 on the day you actually buy the oats.How much did you gain or lose by hedging your position? Oats - 5,000 bu.: Cents per bu. $\begin{array} { | r | r | r | r | r | r | } \hline & \text { Open } & \text { High } & \text { Low } & \text { Settle } & \begin{array} { r } \text { Prev } \\\text { Settle }\end{array} \\\hline \text { Dec } & 229.2 & 231.6 & 226.4 & 230.0 & 236.0 \\\hline\end{array}$

By hedging financial risk,a firm can: