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1.One distinction between futures and forward contracts is

Forward contracts can be used to hedge and speculate, while futures contracts are only used for hedging purposes.

Forward contracts are highly standardized.

Futures contracts mark to market.

Futures contracts highly specialized.

2.

If the spot price for the pound in terms of dollars decreases over a given amount of time, the futures price for pounds (in terms of USD) would likely decrease over that same time period.

True

False

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Lelia Lubowitz
Lelia LubowitzLv2
28 Sep 2019

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8. Which of the following events is likely to increase the value of put options on the common stock of GCC Company?

a)An increase in GCC's stock price.

b)A decrease in the exercise price of the option.

c)A decrease in the amount of time until the option expires.

d)A decrease in the risk-free rate.

9. Which of the following statements is CORRECT?

a) Futures contracts have less default risk because the exchange acts as the counterparty for all transactions

b) Forward contracts trade on an organized exchange and are marked to market daily.

c) Goods are never delivered under forward contracts, but are almost always delivered under futures contracts.

d) Forward contracts are available on individual stocks and futures contracts are for commodities.

10. Which statement is FALSE?

a)Interest Rate swaps often involve companies trading fixed rates for floating rates

b)Companies should always try to reduce risk whenever they can.

c)The coupon rate on Inverse Floaters goes up when interest rates fall

d) Credit Default Swaps pay off when a company goes bankrupt, thus they are like an insurance policy on bonds.

11. Which statement is CORRECT?

a)An option is out of the money if its exercise value is negative.

b)An option is in the money as long as the option price is positive.

c)The time value of an option is highest when the spot price equals the strike price.

d)Companies speculate on derivatives in order to reduce their risk.

Agnes Chin is the chief financial officer of Grains Corp., an established agricultural commodities firm. The headquarters of Grains Corp. is located in Chicago.
It is now January and Agnes is working on two large deals that are coming up in the current year:
-Grains Corp. is going to purchase 100,000 bushels of wheat in 10 months’ time so as to meet its orders upstream.

-Grains Corp. is finally going to sell ofits 50,000 bushels of soybeans that has been in storage for the past 6 months. The transaction is to take place in 3
months’ time.
Prices in these transactions have not been fixed and hence they are risks that Agnes has to consider hedging. She checks the market data as presented below:


Agnes needs to analyse the nature of commodity price risk and the need for hedging this risk in the transactions. Help Agnes in her analysis by answering the following multiple choice questions:
(a) The 3-month forward price for the soybeans that is implied by the data is best approximated by
(i) 400,000
(ii) 500,000
(iii) 600,000

(b) Agnes notices that the 3-month futures price for soybeans that is traded in the market is significantly higher than the implied 3-month forward price. She may
take advantage of the arbitrage opportunity by
(i) selling 3-month soybeans futures to exactly hedge the price for the current storage of soybeans
(ii) buying more soybeans at spot, storing it for 3 months and buying 3-month soybeans futures
(iii) buying more soybeans at spot, storing it for 3 months and selling 3-month soybeans futures

(c) The futures contracts traded at the exchange expire in the months listed here:
March (H), May (K), July (N), September (U) & December (Z)
Is it possible to build a perfect hedge for the purchase of wheat with wheat futures contracts?
(i) Yes
(ii) No and she should enter into the September contract
(iii) No and she should enter into the December contract

(d) Judging from the data, the current state of the commodity market is likely to be
(i) backwardation
(ii) normal backwardation
(iii) contango

(e) If Agnes were to go long on the wheat futures, she will most likely notice that the market price on her futures contracts will
(i) gradually go down if the market remains generally calm
(ii) stay unchanged if the market remains generally calm
(iii) fluctuate significantly even while the market remain generally clam

Question: As a manager of a U.S. domestic company, you are c...

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As a manager of a U.S. domestic company, you are concerned about foreign currency exposure of your firm’s sales to the United Kingdom. You currently export $10 million of products to the United Kingdom annually and receive payment in pounds sterling. You send two large shipments each year valued at $5 million each. The invoice carriers net 90-day terms. Thus, from the invoice date, your company is exposed to currency exchange risk for a period of 90 days.

You are considering the possibility of using futures, options, or futures options as possible hedging tools. Your broker recently sent you the following data on the various hedging contracts available for your June 1 invoice with payments due September 1.

Current exchange rate (June 1) $1.67 per pound

Assumed spot exchange rate on September 1 is $2.00

$90-day forward rate as of June 1: $1.65

Options (31,250)

Striking price

June 1, September

Call Premium

Call Premium

September 1

165.0

4.35

35.00

170.0

2.40

30.00

175

1.20

25.00

Future options (62,500)

Striking price

June 1, September

Call Premium

Call Premium

September 1

1650

4.12

33.00

1700

2.20

27.00

1750

1.06

22.00

Future (62,500)

June 1

Settle

September 1

Settle

September

1.6496

2.055

a. Assume you don’t hedge. Calculate the dollar loss occurring from the change in exchange rates from June 1 to September 1.

b. Assume you hedge with an options contract. Calculate the net result from the change in the exchange rates from June 1 to September 1. Assume commission fees equal $60.

c. Assume you hedge with a futures option contract. Calculate the net result from the change in the exchange rate from June 1 to September 1. Assume commission fees equal $60.

d. Assume you hedge with a futures contract. Calculate the net result from the hedge assuming that the margin for one contract is $1,000 and roundtrip commission fees equal $60.

e. Assume you enter into a 90-day forward rate agreement. Calculate the net result from the hedge assuming that the fee for the agreement is $150.

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