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Chapter 23
Enterprise Risk Management
Multiple Choice Questions
1.
Farmer Jones raises several hundred acres of corn and would suffer a
significant loss should the price of corn decline at harvest time. Which one
of the following would he be doing if he purchased financial securities to
offset this price risk?
2.
The value of a stock option is dependent upon the value of the underlying
stock. Thus, a stock option is a:
3.
Farmer Mac owns a large orange grove in Florida. The value of his business
is directly related to the price of oranges. Which one of the following is a
graphical representation of this price-value relationship?
4.
Farmer Ted planted 200 acres in wheat this year. The weather has been
perfect and he expects to harvest a record crop within the next two weeks.
At present, he has no storage facilities and therefore must sell his crop as
soon as it is harvested. Which one of the following risks is he facing
because he must sell his crop at whatever the market price is at harvest
time?
5.
For years, your family has operated a business that produces lawn mowers.
Over the years, the industry has progressed and new mass production
techniques have been developed. However, your firm cannot afford this new
technology, nor can you compete against those firms that can. Thus, the
family has decided to close its facility at the end of the year. Which one of
the following describes the risks to which your family's firm succumbed?
6.
This morning a cereal maker agreed to pay a farmer $4.40 a bushel for
5,000 bushels of wheat that the farmer will ship to the factory four months
from now. What is this legally binding agreement called?
7.
A graph depicting the gains and losses a seller of a forward contract would
earn at various market prices is referred to as a:
8.
By definition, which one of the following contracts is marked to the market
on a daily basis?
9.
Southern Groves raises tangerines. To hedge its risk, the firm trades in the
orange futures market. This process is known as:
10.
The National Bank has an agreement with The Foreign Bank to exchange
500,000 U.S. dollars for 380,000 Euros on the first day of each of the next 3
calendar quarters. This agreement is best described as a(n):
11.
An agreement that grants its owner the right, but not the obligation, to buy
or sell a specific asset at a specific price for a set period of time is called
a(n) _____ contract.
12.
Sue recently purchased a right to buy 100 shares of ABC stock for $27.50 a
share if she so chooses at any time within the next four months. Which one
of the following does Sue own?
13.
Steve recently sold an option that requires him to purchase 100 shares of
Omega stock at $40 a share should the option owner decide to exercise the
option. What type of option contract did Steve sell?
14.
Which one of the following can a firm do if it effectively manages its
financial risks?
15.
A hedge between which two of the following firms is most apt to reduce
each firm's financial risk exposure?
16.
Which one of the following statements is correct in relation to a firm's
short-run financial risk?
17.
Long-run financial risk:
18.
By hedging financial risk, a firm can:
19.
The seller of a forward contract:
20.
A bakery generally enters into a forward contract in wheat as a:
