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86. Which one of the following characteristics is similar in both futures and forward
contracts?
87. A forward market contract to buy Japanese yen three months in the future at a price of
¥105/$ will:
88. Nestlé wishes to obtain a loan denominated in Swiss francs but the U.S. market offers
better credit terms. What should Nestlé do?
89. Currency swaps are used to:
90. Why might an individual or organization be willing to swap their fixed-rate loans for
floating-rate loans?
91. Interest rate swaps allow both counterparties to:
92. A firm can hedge the risk of upward movement in raw material prices by:
93. A farmer can hedge the risk of downward movement in the price of his product by:
94. General Mills paid a premium of $0.10 per bushel to buy September call options for wheat
with an exercise price of $6.80. If the price of wheat at the expiration is $6.90, what is the net
cost of one bushel of wheat for General Mills?
95. A farmer hedged his risk by buying put options on wheat with an exercise price of $6.70
at a price of $0.14 per bushel. If the price of wheat at the expiration of the contract is $6.70, what
is the net revenue from each bushel of wheat?
96. A copper producer is worried about declining copper prices. The risk of downward
movement in prices can be hedged by:
97. A miller can hedge the price risk on wheat by:
98. Which one of the following statements is correct?
99. The most active trading in forward contracts is in:
100. At the expiration of a futures contract, the futures price will be:
101. Which one of the following is the major difference between forward and futures
contracts?
102. How can companies use swaps to change the risk of securities that they have issued?
103. Why do companies hedge to reduce risk?
104. How can options, futures, and forward contracts be used to devise simple hedging
strategies?
105. A large dental lab plans to purchase 1,000 ounces of gold in 1 month. Assume that gold
prices can be $280, $300, or $320 an ounce.
a. What will total expenses be if the firm purchases call options on 1,000 ounces of gold with an
exercise price of $300 an ounce? The options cost $3 per ounce.
b. What will total expenses be if the firm purchases call options on 1,000 ounces of gold with an
exercise price of $295 an ounce? These options cost $7 per ounce.
106. Consolidated Bakeries needs to acquire 100,000 bushels of wheat each quarter. The spot
price is $6.75 per bushel but is expected to increase. Consolidated can purchase call options on
5,000 bushels of wheat with a strike price of $6.80 per bushel and a premium of $0.03 per bushel.
Calculate total expected savings from purchasing the options if wheat is forecasted to sell at
$6.90 per bushel in 3 months. Conversely, how much did it cost to hedge if the wheat price is
unchanged in 3 months?
