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CHAPTER 23
ENTERPRISE RISK MANAGEMENT
Answers to Concepts Review and Critical Thinking Questions
1. Since the firm is selling futures, it wants to be able to deliver the lumber; therefore, it is a supplier.
4. The firm is hurt by declining oil prices, so it should sell oil futures contracts. The firm may not be able
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8. The company would like to lock in the current low rates, or at least be protected from a rise in rates,
12. The risk is that the dollar will strengthen relative to the yen, since the fixed yen payments in the future
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14. There are two sides to this story. As one money manager said: “There’s just no reason that these
Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple
steps. Due to space and readability constraints, when these intermediate steps are included in this solutions
manual, rounding may appear to have occurred. However, the final answer for each problem is found
without rounding during any step in the problem.
Basic
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2. The price quote is $36.987 per ounce and each contract is for 5,000 ounces, so the initial contract value
is:
3. The price quote is $0.1980 per pound and each contract is for 15,000 pounds, so the cost per contract
is:
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4. The call options give the manager the right to purchase oil futures contracts at a futures price of $110
5. The price quote is $0.0265 per pound and each contract is for 15,000 pounds, so the cost per contract
is:
Intermediate
6. The expected loss is the value of the asset times the probability of a loss. In this case, the expected
loss will be:
7. a. You’re concerned about a rise in corn prices, so you would buy December contracts. Since each
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8. a. XYZ has a comparative advantage relative to ABC in borrowing at fixed interest rates, while
b. If the swap dealer must capture 2 percent of the available gain, there is 1 percent left for ABC
Challenge
9. The financial engineer can replicate the payoffs of owning a put option by selling a forward contract
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10. a. The actuarially fair insurance premium is the present value of the expected loss. So:
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