Deck 24: Options and Corporate Finance

Question 1

Interest rate volatility creates a need for financial engineering.

Answer 1

True

Question 2

Interest rate forward contracts are publicly traded.

Answer 2

False

Question 3

The main difference between a forward contract and a futures contract is that the contract price
changes hands at the initiation of the contract with forward contracts but at maturity with futures.

Answer 3

False

Question 4

Commodity prices, inflation, exchange rates and interest rates have become less volatile over the
past thirty years.

Question 5

The main difference between a futures contract and a forward contract is that with the former,
buyers and sellers realize gains or losses on the settlement date, while the latter requires that gains
or losses are realized daily.

Question 6

The volatility of Canadian short-term interest rates increased after March 1980 due to a change in
the way the Bank of Canada manages interest rates.

Question 7

Commodity prices, inflation, exchange rates and interest rates have become more volatile over the
past thirty years.

Question 8

For forward contracts, the payoff profile for the seller of a forward contract is a downward sloping
linear function.

Question 9

For forward contracts, if a buyer of a contract wins by $100 then the seller incurred a $100 loss.

Question 10

Firms with low financial distress costs or those with easy access to capital markets most frequently
use derivatives.

Question 11

Firms with high financial distress costs or those with constrained access to capital markets most
frequently use derivatives.

Question 12

Gateway Reproductions uses sheet steel to manufacture reproduction fenders for classic
automobiles. The firm's risk profile with regard to sheet steel will be downward-sloping.

Question 13

Organized trading is much more common in forward contracts than in futures contracts.

Question 14

It is easier to hedge long-term financial risk than to hedge short-term financial risk.

Question 15

The prices of goods and services have remained relatively stable over the last three decades, but
the year-to-year rate of change in those prices has increased dramatically.

Question 16

The risk of default is larger with futures contracts than with forward contracts largely because the
value of the futures contract is marked-to-market daily, resulting in a higher chance that one of the
individuals will be unable to make the required deposit.

Question 17

A key difference between an option contract and a forward contract is that the option price is
determined at settlement while the forward price is determined when the contract is initiated.

Question 18

Hedging done at a divisional level can increase the overall financial risk of a firm.

Question 19

Your company uses wheat in the production of a cereal product. To lock in the acquisition cost of
your wheat, you could either sell a futures contract on wheat, or sell a futures call option on wheat.

Question 20

A financially sound firm can become financially distressed as the result of its short-run exposure to
financial risk.

Question 21

Interest rate swaps can be used to change the index which determines the variable rate on a firm's
debt.

Question 22

Futures option contracts does not create a transaction obligation for both contracting parties in the
future.

Question 23

Interest rate swaps are often used in conjunction with a currency swap.

Question 24

Interest rate volatility affects the borrowing costs of a firm.

Question 25

A speculator, not a hedger, would purchase a futures contract even though they had no interest or
ownership in the underlying asset.

Question 26

Interest rate swaps are commonly used in business.

Question 27

Options contracts are a zero sum game.

Question 28

A swap contract consists of a series of forward contracts.

Question 29

In Canada, stock brokers are responsible for arranging the majority of swap transactions.

Question 30

You are a cattle rancher. To lock in the sale price for your cattle, you could either sell a futures
contract on cattle, or buy a futures put option on cattle.

Question 31

With Options contracts, money does not change hands when the contract is created.

Question 32

An interest rate swap is often used in conjunction with a currency swap.

Question 33

A swap contract can be based on currencies, interest rates, or commodities.

Question 34

Interest rate swaps can benefit both the buyer and the seller.

Question 35

The Chicago Mercantile Exchange and the Chicago Board of Trade are futures exchanges.

Question 36

A key difference between an option contract and a forward contract is that option contracts can be
resold but forward contracts cannot.

Question 37

An option contract can be based on a futures contract to create a futures option.

Question 38

An option contract can be based on a foreign currency.

Question 39

An interest rate swap is theoretically appealing but rarely used in actual practice.

Question 40

The New York Stock Exchange is not a futures exchange.

Question 41

You think the price of GM stock is going to fall. In order to make money, you could either sell a call
option on GM stock, or buy a put option on GM stock.

Question 42

Mitch sold 10 futures contracts on copper at a price of $.8063 per pound. Contracts on copper are set at 25,000 pounds. What is the amount of Mitch's profit or loss if the price on the maturity date is
$)8104?

A) -$1,025.00
B) -$410.00
C) -$102.50
D) $102.50
E) $1,025.00

Question 43

The payment of a premium when the contract is entered represent a difference between an option
contract and a forward contract.

Question 44

An option contract can be used to either hedge risk or speculate in the market.

Question 45

How much will you pay per pound for a September 170 orange juice futures call option? Orange juice - 15,000 lbs: cents per lb.

A) $0.0245
B) $0.0350
C) $0.245
D) $0.350
E) $2.450

Question 46

You buy 15 wheat futures contracts when the futures price is $2.61 per bushel (each contract is for 5,000 bushels). The price on the maturity date is $2.21. What is your payoff?

A) -$30,000
B) -$2,000
C) $0
D) $2,000
E) $30,000

Question 47

Aaron purchased a call on 35,000 bushels of corn with a strike price of 210. On the expiration date, the corn was selling at $1.98 per bushel. Option contracts on corn are based on 5,000 bushels.
Ignore the cost of the call and all transaction costs. What is the payoff on the call contract?

A) -$4,200
B) -$2,100
C) $0
D) $2,100
E) $4,200

Question 48

You purchased three July futures contracts on silver when the price quote was 13.405. Given today's prices as shown in the table, your total profit or loss to date is:
Silver - 5,000 troy oz.: cents per troy oz.

A) -$1,005
B) -$335
C) $1,090
D) $1,440
E) $3,270

Question 49

The obligation of the buyer represent a difference between an option contract and a forward
contract.

Question 50

You think the price of GM stock is going to rise. In order to make money, you could either sell a call
option on GM stock, or buy a put option on GM stock.

Question 51

The buyer of an American option has less flexibility with respect to the date of exercise than the
buyer of an otherwise identical European option.

Question 52

An option contract can be used to speculate in the market.

Question 53

Andrea bought futures contracts on 560,000 pounds of domestic sugar at a price of 21.48 cents per pound. Futures contracts on sugar are for 112,000 pounds. What is the amount of Andrea's profit or
Loss if the price at contract expiration is 21.32?

A) -$8,960.00
B) -$896.00
C) -$.80
D) $.80
E) $896.00

Question 54

An option contract can be used to hedge risk.

Question 55

What is the current value of the open interest in the October futures contract on cotton?

A) $2.820 million
B) $2.853 million
C) $100.815 million
D) $101.977 million
E) $178.750 million

Question 56

Given the following information, what is the price per troy ounce that will be used for today's marking-to-market for the September silver contract?
Silver - 5,000 troy oz.; $ per troy oz.

A) $.10428
B) $.10511
C) $10.428
D) $10.511
E) $10.553

Question 57

You expect to deliver 60,000 bushels of wheat to the market in September. Today, you hedge your position by selling futures contracts on half of your expected delivery at the final price of the day.
Assume that the market price turns out to be 495´5 at the time you make your delivery in
September. How much more or less would you have earned if you had not bought the futures
Contracts?
Wheat - 5,000 bu.: cents per bu.

A) $24,000 less
B) $2,400 less
C) $0 more or less
D) $2,400 more
E) $24,000 more

Question 58

What is the highest price per troy ounce that the July futures contract on silver has traded? Silver - 5,000 troy oz.; $ per troy oz.

A) $10.502
B) $10.509
C) $10.529
D) $10.553
E) $10.557

Question 59

Lew purchased four December futures contracts on cotton at the closing price yesterday and sold them today at the high. What is Lew's profit or loss on this investment?

A) -$100
B) $560
C) $1,120
D) $2,240
E) $4,580

Question 60

Raoul purchased both a call and a put on 125,000 bushels of soybeans. Both options have a strike price of 510 and a common expiration date. Soybean contracts are based on 5,000 bushels. The
Price of soybeans on the expiration date is 530. Ignore the costs of the options and all transaction
Costs. What is Raoul's profit or loss on these two option contracts?

A) -$25,000
B) -$12,500
C) $0
D) $12,500
E) $25,000

Question 61

Assume you purchased one October futures contract at the lifetime low and sold the contract at the lifetime high. How much profit would you have?

A) $500
B) $620
C) $2,850
D) $9,250
E) $9,650

Question 62

Suppose you are interested in purchasing the September futures contract. What is the futures price of 15,000 lbs. of orange juice for September delivery?

A) $11,625
B) $12,330
C) $12,450
D) $13,863
E) $13,275

Question 63

What is the closing value on this day for one December futures contract on corn? Corn - 5,000 bu.; cents per bu.

A) $12,030
B) $12,620
C) $12,640
D) $12,765
E) $12,795

Question 64

You expect to deliver 80,000 bushels of corn to the market in September. Today, you hedge your position at the closing price as shown in the table. Assume that the market price turns out to be
264)8 at the time you make your delivery in September. How much income will you receive in total
From the hedged delivery of your corn?
Corn - 5,000 bu.; cents per bu.

A) $202,240
B) $206,710
C) $208,970
D) $210,000
E) $211,840

Question 65

For purposes of marking to market, what is the current price of orange juice for January 2008 delivery?

A) $12,438
B) $12,450
C) $12,548
D) $13,200
E) $13,275

Question 66

What was the highest contract price that the November orange juice futures contract has traded for over its lifetime?

A) $12,075
B) $12,863
C) $15,642
D) $16,988
E) $17,963

Question 67

You sell one futures contract for 112,000 pounds of sugar with a settlement price of 20.87 cents per pound. If the price is 19.63 cents per pound at the contract expiration, what is your payoff?

A) -$138,880
B) -$122,420
C) $115,378
D) $122,420
E) $138,880

Question 68

How much will you pay to purchase three September 165 orange juice futures put option contracts? Orange juice - 15,000 lbs: cents per lb.

A) $1,477.50
B) $4,432.50
C) $14,775.00
D) $147,750.00
E) $443,250.00

Question 69

What is the difference in the total pounds of cotton represented by open interest in the December futures versus the October futures?

A) $2.219 billion pounds
B) $2.040 billion pounds
C) $2.209 billion pounds
D) $221.9 million pounds
E) $204.0 million pounds

Question 70

You own a small gold mine in Mexico. You expect to deliver 200 ounces of gold to the market in April. You decide to hedge your position at the 550 exercise price. How much will you receive in
Total, including the option premium, for your 200 ounces of gold if the market price of gold is $552
In April?
Gold - 100 troy oz.; $ per troy oz.

A) $108,180
B) $108,980
C) $109,380
D) $110,000
E) $111,820

Question 71

You purchased two April futures contracts on gold when the price quote was 656.7. Given today's prices as shown in the table, what is your current profit or loss?
Gold - 100 troy oz.: dollar and cents per troy oz.

A) $40
B) $80
C) $120
D) $380
E) $760

Question 72

S&P 500 INDEX (CME); $500 times index May 12, 2007 Suppose that yesterday you purchased one December futures contract at the settle price. At the close of business today, how much is your contract worth? (Ignore margin considerations.)

A) $5,875 less than yesterday
B) $11.7 less than yesterday
C) $11.7 more than yesterday
D) $5,850 more than yesterday
E) $5,875 more than yesterday

Question 73

What was the lowest contract price at which 15,000 lbs. of orange juice for July delivery traded on the day quoted?

A) $11,235
B) $11,625
C) $12,330
D) $12,075
E) $12,345

Question 74

You buy one futures contract for 5,000 bushels of soybeans with a settlement price of $6.92 per bushel. If the price is $7.58 per bushel at the contract expiration, what is your payoff?

A) -$37,900
B) -$3,300
C) $2,130
D) $3,300
E) $37,900

Question 75

You speculate in the market by selling 15 gold futures contracts when the futures price is $418.23 per ounce. The price on the contract maturity date is $397.62. What is your total profit (loss) if the
Contract size is 100 ounces?

A) $206
B) $309
C) $2,061
D) $20,610
E) $30,915

Question 76

You own three September futures contracts on silver. What is the total value of your position as of the end of this day's trading?
Silver - 5,000 troy oz.; $ per troy oz.

A) $156,420
B) $157,020
C) $157,665
D) $157,935
E) $158,355

Question 77

Ted purchased two October futures contracts on cotton at the closing price yesterday and sold the contracts at the opening price today. What is the amount of Ted's profit or loss on this investment?

A) -$500
B) -$350
C) $175
D) $1,425
E) $1,650

Question 78

Given the following information, what is the price per troy ounce that will be used for today's marking-to-market for the July silver contract?
Sliver - 5,000 troy oz: dollars and cents per trot oz.

A) $13.299
B) $13.338
C) $13.501
D) $13.623
E) $13.639

Question 79

What was the highest price per troy ounce for the December silver futures contract today? Sliver - 5,000 troy oz: dollars and cents per trot oz.

A) $13.684
B) $13.847
C) $13.801
D) $13.623
E) $13.639

Question 80

Juan purchased March coffee futures on 150,000 pounds this morning at the open. How much did this purchase cost him?

A) $101,775
B) $102,000
C) $103,500
D) $103,875
E) $105,750