Question 1

Your oil refinery will need to buy 250,000 barrels of crude oil in one week and it is worried about crude oil prices.Suppose you buy 250 crude oil futures contracts,each for 1000 barrels of crude oil,at the current futures price of $68 per barrel.Suppose futures prices change each day over the next week as follows:
  What is the daily and cumulative mark-to-market profit or loss (in thousands)that you will have on each of the next five days?

Accepted Answer

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Question 2

________ is the sensitivity of a firm's assets and liabilities to interest rate changes.

Accepted Answer

Duration measures the sensitivity of a firm's assets and liabilities to interest rate changes. A higher duration means that a firm's cash flows are more affected by changes in interest rates, while a lower duration means that a firm's cash flows are less sensitive to changes in interest rates.

Question 3

The six-month LIBOR rate for a reference period is 10% (annualized).The fixed six-month coupon rate for the same period is 5%.Compute the payment to the floating-rate payer if the notional principal is $100 million.

Accepted Answer

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Question 4

What are some of the disadvantages of long-term supply contracts?

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Question 5

What is the percentage change in a 10-year zero-coupon bond with a duration of 10 years,when interest rates increase from 3% to 4%?

Accepted Answer

The correct answer is A because the percentage change in the price of a zero-coupon bond is equal to the negative of the duration multiplied by the change in interest rates. In this case, the duration is 10 years and the change in interest rates is 1%, so the percentage change in the price of the bond is -10% * 1% = -10%.

Question 6

Securities whose value comes mostly from later cash flows have a shorter duration than do securities whose value comes mostly from earlier cash flows.

Accepted Answer

Duration measures the sensitivity of a bond's price to changes in interest rates, and securities that receive most of their value from later cash flows (like a bond paying mostly at maturity) have a longer duration because they are more affected by interest rate changes over time compared to securities that receive most of their value from earlier cash flows.

Question 7

A(n)________ is a contract entered into with a bank in which the firm and the bank agree to exchange coupons from two different types of loans.

Accepted Answer

An interest rate swap is a financial contract where two parties agree to exchange interest rate cash flows based on a notional principal amount. In this case, the firm and bank agree to exchange coupons from two different types of loans, which is an example of an interest rate swap. The other options, hedge, call, put, and futures contract, do not accurately describe this type of contract.

Question 8

What is the percentage change in a 7-year zero-coupon bond with a duration of 7 years,when interest rates increase from 6% to 7%?

Accepted Answer

The percentage change in the price of a bond is approximately equal to the negative of the duration times the change in interest rates. Here, the duration is 7 years, and the change in interest rates is 1% (from 6% to 7%). Thus, the percentage change is approximately -7 * 0.01 = -0.07 or -7%. However, since the bond is a zero-coupon bond, the actual calculation results in a slightly smaller percentage change, which is approximately -6.4%.

Question 9

The six-month LIBOR rate for a reference period is 7% (annualized).The fixed six-month coupon rate for the same period is 4%.Compute the payment to the floating-rate payer if the notional principal is $200 million.

Accepted Answer

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Question 10

By combining ________ with ________,firms can choose which of these sources of interest rate risk they will tolerate and which they will eliminate.

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Question 11

A firm can borrow at fixed AA rates minus 1% for long-term loans.If it swaps its long-term payments so that it receives the fixed AA rate and pays a AA floating rate,what is the rate of interest on its borrowing if the floating rate is r%?

Accepted Answer

The firm can borrow at fixed AA rates minus 1%, so the fixed AA rate is [floating rate + 1%]. 
When it swaps its long-term payments to receive fixed AA rate and pay a floating AA rate, it is receiving [floating rate + 1%] and paying [floating rate].

Therefore, the net effect of the swap is that they are effectively borrowing at [floating rate + 1%] and paying [floating rate].

This is equivalent to borrowing at [floating rate + (floating rate - 1%)] = [2 x floating rate - 1%].

Thus, if the floating rate is r%, the rate of interest on the borrowing is [2 x r% - 1%].

The closest answer choice is B) r - 1%.

Question 12

What is a margin call?

Accepted Answer

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Question 13

A firm can borrow at a floating rate of LIBOR + 1% on short-term loans.If it swaps its short-term payments so that it receives LIBOR + 2% and pays a fixed rate of 3%,what is the rate of interest on its borrowing?

Accepted Answer

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Question 14

A(n)________ is only used to calculate coupon payments on a swap but is never actually paid.

Accepted Answer

The notional principal is the amount of principal that the swap is based on, which is used to calculate coupon payments between the two parties. It is never actually paid, but it determines the size of the payments. Choices A, B, C, and E do not accurately describe the concept being described.

Question 15

A gold mining firm sells futures contracts worth 1000 ounces at a price of $700 per ounce for maturity one year from today.If gold futures prices increase to $752 per ounce,what is the cash flow to the producer?

Accepted Answer

The cash flow to the producer can be calculated using the formula: 
Cash flow = (Futures price at maturity - Futures price at contract initiation) x Number of contracts x Size of each contract 
= ($752 - $700) x 1000 x 1 
= $52,000 
Since the futures price has increased, the producer would receive a positive cash flow of $52,000. However, since the question asks for the cash flow to the producer, the answer should be negative, indicating that the producer has a liability to pay this amount to the buyer of the futures contract. Therefore, the correct answer is D, -$52,000.

Question 16

The six month LIBOR rate for a reference period is 6.8% (annualized).The fixed six-month coupon rate for the same period is 3.9%.Compute the payment to the floating-rate payer if the notional principal is $100 million.

Accepted Answer

The floating-rate payer pays the difference between the LIBOR rate and the fixed coupon rate, multiplied by the notional principal and the fraction of a year. In this case, the difference is 6.8% - 3.9% = 2.9%, the notional principal is $100 million, and the fraction of a year is 6 months / 12 months = 0.5. Therefore, the payment to the floating-rate payer is 2.9% * $100 million * 0.5 = $1.45 million.

Question 17

A firm can borrow at fixed AA rates plus 1% for long-term loans.If it swaps its long-term payments so that it receives the fixed AA rate and pays a AA floating rate,what is the rate of interest on its borrowing if the floating rate is r%?

Accepted Answer

The firm initially borrows at a fixed rate of AA + 1%. By entering into a swap, it receives the fixed AA rate and pays the floating rate r%. Thus, the net interest rate it pays is the floating rate r% plus the 1% premium over the AA rate.

Question 18

How do futures contracts eliminate credit risk?

Accepted Answer

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Question 19

A firm can borrow at fixed AA rates for long-term loans.If it swaps its long-term payments so that it receives the fixed AA rate and pays a AA floating rate,what is the rate of interest on its borrowing if the floating rate is r% and the fixed rate is 1%?

Accepted Answer

In a swap, the two parties exchange cash flows based on different instruments or rates. In this case, the firm chooses to receive payments at the fixed AA rate and pay at the AA floating rate.

Initially, the firm was paying a fixed rate of 1%. But after the swap, it will receive the fixed AA rate and pay the AA floating rate, which we assume to be r%.

The overall rate of interest on the firm's borrowing is the difference between the fixed AA rate and the floating AA rate. As the firm receives the fixed AA rate and pays the AA floating rate, the rate of interest is:

Fixed AA rate - AA floating rate = 1% - r% = (1-r)%

Therefore, the rate of interest on the firm's borrowing after the swap is (1-r)%. And the closest answer choice to this is C) r%.

Question 20

What is the percentage change in a 5-year zero-coupon bond with a duration of 5 years,when interest rates increase from 9% to 10%?

Accepted Answer

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Quiz 21: Risk Management

________ is the sensitivity of a firm's assets and liabilities to interest rate changes.

The six-month LIBOR rate for a reference period is 10% (annualized) .The fixed six-month coupon rate for the same period is 5%.Compute the payment to the floating-rate payer if the notional principal is $100 million.