Risk Management 1 - You decide to hedge by purchasing the...

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Old Exam Questions - Risk Management Page 1 of 2 Pages Risk Management 1. Ideally, hedging transactions are: A. Zero-NPV transactions B. Positive NPV transactions C. Negative NPV transactions D. None of the above 2. Derivatives can be used either to hedge or to speculate. These actions: A. Increase risk in both cases B. Decrease risk in both cases C. Spread or minimize risk in both cases D. Offset risk by hedging and increase risk by speculating 3. An exporter in the USA is expecting a payment of BP 5 million in three months. He is planning to hedge the position using options. He should: A. Buy call options B. Buy put options C. Write put options D. None of the above 4. Assume that in May you know that you will have $1,000,000 in August to invest in 90- day T-bills. Currently, 90-day cash T-bills have a yield of 4.00%, 120-day cash T-bills have a yield of 3.80% (a spread of -20 basis points), and the September 90-day T-bill futures contract has a yield of 3.30%.
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Unformatted text preview: You decide to hedge by purchasing the September futures contract, knowing that you will take off the hedge in August and purchase 90-day cash T-bills. Assume now that in August the spread between 3-month and 4-month T-bills changes to +15 basis points, such that 90-day cash T-bills have a yield of 2.90% and 120-day cash T-bills (as well as the September futures contract) have a yield of 3.05%. What will be your effective yield from this hedge? A. 3.30% B. 3.15% C. 2.90% D. 3.05% E. 3.45% 5. On November 13, Al buys a July futures contract on 100 tons of soybean meal at a price of $172.0 a ton. On the same day, Bob sells this futures contract at the same price. On November 14, the July contract is trading at $174.2 a ton. Given that the contract is marked to market, what payments need to be made on the 14 th ? (Ignore transaction costs.) A. Al pays the clearing house $220 and the clearing house pays Bob $220...
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